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Canadian gas in recovery mode Sector has reason to see rebound from 5-year price, drilling lows, with North American production, LNG imports shrinking, demand rising Gary Park For Petroleum News
There are shreds of hope that the Canadian natural gas sector is pulling out of the doldrums.
A bump in gas prices to 15-month highs, a rapid draw-down of gas in storage, forecasts of colder weather through March, tightening supplies across North America, a sharp drop off in liquefied natural gas imports and a rebound in Canadian rig numbers — all contribute to belief of a resurgence.
With gas trading at more than US$9 per million British thermal units on the New York Mercantile Exchange recently, there is basis for optimism in the United States.
Canada, which traditionally lags about US$1 per million Btu behind U.S. prices, needs to see something closer than US$10 because of its higher operating costs.
But even the current trends have been enough to see oil and gas producers in Canada put 593 rigs to work, just 10 short of the total a year ago and a major advance from earlier in the winter when the year-over-year gap was closer to 20 percent, according to the Canadian Association of Oilwell Drilling Contractors.
Roger Soucy, president of the Petroleum Services Association of Canada, is not yet ready to climb on the bandwagon, suggesting gas prices will have to achieve some degree of permanence before his association changes its forecasts of 14,500 wells in Western Canada this year.
More gas-fired power plants But there is no shortage of others ready to put a positive spin on developments.
ARC Financial, noting that Canadian production is off 1.5 billion cubic feet per day from a year ago, said U.S. demand is building, largely because of construction of more gas-fired power generation plants.
“This is bullish news for gas consumption,” ARC chief economist Peter Tertzakian said in a research note.
He said gas is taking away market share from less environmentally friendly oil and coal — a factor that “supports sustainable higher prices for natural gas going into the next era.”
Western Canadian storage was only 281 bcf at the end of January and, according to FirstEnergy Capital, could shrink another 75-80 bcf in February and March, placing levels in the middle of a five-year range.
Current trends point to cumulative heating-season withdrawals of 233 bcf, the largest this decade.
In a new report, FirstEnergy said the region’s squeeze on supplies will likely pose a challenge to filling storage in the coming injection season.
It estimated levels will be 375 bcf by the end of October, considerably below the record 430 bcf last October.
FirstEnergy expects only about 175 bcf will be injected in the April-October period, leaving working gas storage for Western Canada at 82 percent of capacity, compared with 97 percent in October 2007, contributing to a “more price bullish picture” for North American markets, said analyst Martin King.
The investment dealer is currently forecasting a Nymex price of US$7.25 per million Btu in 2008, but is expected to raise that in April once it has a better reading on the storage picture.
Eresman sees gas prices rising Despite a number of uncertainties, dominated by the outcome of industry negotiations on Alberta’s final royalty regulations, EnCana Chief Executive Officer Randy Eresman said a forecast 5 percent drop in Canadian output this year, including a drop of about 1 bcf per day in Canadian exports to the U.S. over the next year, will have a “positive” impact on North American gas prices.
Eresman said “fairly significant” withdrawals from storage, the decline in LNG imports because of higher prices being offered in Europe, “slowing” production growth in the U.S. combined with rising demand from the U.S. electrical-generation sector and an easing of upstream costs in both the U.S. and Canada will all play a role in rebuilding prices.
He predicts overall cost inflation in the U.S. gas sector this year of 0 percent-5 percent, while a “flattening” in Canada will allow EnCana to return to pre-2005 levels when it believed its own internal efficiencies could offset inflation.
Labor costs in Western Canada will remain relatively high because of a sizzling pace of construction, wiping out any prospects that a falloff in oil and gas drilling from a peak 25,000 wells in 2005 to 18,540 in 2007 and 14,500 this year will spur new activity, Eresman said.
Alberta’s proposed royalty hikes, starting Jan. 1, 2009, and the Canadian government’s decision to start taxing royalty trusts in 2011 has further squeezed Canadian spending, he said.
However, there is hope that regardless of who wins a March 3 Alberta election, the new government will see the need for royalty changes that stimulate the hard-hit gas industry.
Eresman said the royalty overhaul is just one of a “litany of issues” that must be addressed to make the Alberta industry competitive enough to raise year-round activity.
Resource base changing EnCana Executive Vice President Gerry Protti said “one of the issues that the (Alberta) government and industry and stakeholders will have to discuss is the changing nature of the resource base.
“The conventional industry that grew (Alberta) over the last 50 years is rapidly declining and disappearing but there is a huge unconventional base,” he said.
Protti said the different cost and environmental pressures of developing unconventional resources, such as coalbed methane, have not been grasped by the Alberta government and EnCana is anxious to engage in a debate about balancing those economics.
He said the government’s willingness to discuss the “unintended consequences” of its proposed royalty framework is a source of hope that the final regime “will reflect the higher costs of developing unconventional resources.”
Along with other companies engaged in exploration and development of deep, highly productive wells, EnCana is “not so much looking for a decrease in royalties; it’s really the timing of the royalties that’s important,” which requires the government to reduce the front-end loading of royalties on “early-life plays,” Eresman said.
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