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Gas drags Alberta down One-time petroleum powerhouse reeling from slump in commodity prices Gary Park For Petroleum News
It’s not as bad as forecasters expected. In fact, it’s worse.
Forget the Alberta government’s boastings about 15 straight years of budget surpluses and its almost unheard-of debt-free status. That’s stuff of distant memory.
The one-time powerhouse of Canada’s energy industry seems to be entering a dark tunnel, with no idea whether or when it might emerge, to again enjoy — in the words of Winston Churchill — a “broad, sunlit upland.”
For now, the government is talking only about new deficits, harsh spending cuts, the prospect of higher taxes and reduced services as it searches for C$2.2 billion in savings over the next year.
Just a year after reveling in oil prices of US$147 a barrel and not long after lapping up natural gas prices of C$12-$14 a gigajoule, Alberta Treasury Board President Lloyd Snelgrove delivered the tough news to meetings with 90 business, health, education and municipal leaders.
At the hastily called gatherings, he reported a budget deficit of C$852 million for the 2008-09 fiscal year ended March 31 — a stunning turnaround from government predictions last summer of an C$8.5 billion surplus.
Snelgrove’s boss, Premier Ed Stelmach, delivered an unusually blunt assessment to a Calgary audience. “Times are changing and they’re changing very quickly,” he said.
C$4.7 billion deficit forecast The government’s budget forecast for 2009-10 is a C$4.7 billion deficit, which Snelgrove warned is likely to grow (some are already betting on at least C$6 billion) due to the plunge in natural gas prices — and no one is saying whether Alberta can meet its target of four successive years of red ink before returning to the black.
“We know we’re faced with a long-term challenge around revenue with natural gas, so a course correction is essential,” he said, while also rejecting criticism that his government has mismanaged its finances.
Natural gas accounts for two-thirds of Alberta’s nonrenewable resource wealth — a surprise to many in the province and most outside who think of Alberta as an oil-based economy.
In its 2009-10 budget, the government projected average gas prices of C$5.50 per gigajoule. In the first two months of the fiscal year, the price has averaged a dismal C$3.75 and has been on the skids ever since then.
For the 2008-09 fiscal year, the province’s revenue from gas and byproducts totaled C$5.83 billion, up C$630 million from the previous year, while royalties from synthetic crude oil and bitumen edged up only C$60 million to C$2.97 billion and income from conventional oil production rose C$140 million to C$1.8 billion.
Alberta’s direct revenue from non-renewable resources (excluding taxes and other indirect spinoffs), grew by about C$900 million in 2008-09 to C$11.92 billion, including C$1.11 billion from land sales.
Course correction needed But the optimism those numbers would normally have spawned had evaporated long before they were released.
“This huge ship that is Alberta needs a course correction, but we don’t want to sink it,” Snelgrove said.
The one shred of mildly encouraging news he offered was a stock-market driven recovery of C$700 million since March 31 in the Alberta Heritage Savings Trust Fund, compiled from surplus oil and gas revenues. That pushed the fund’s value to C$14.7 billion, after it chalked up a C$3 billion loss in 2008-09.
Although Alberta’s oil-weighted producers, especially those in heavy oil, are regaining a measure of confidence, there is nothing but gloom in store for gas producers.
Traditionally, based on the energy they contain, 6 gigajoules (or 6 million British thermal units) of gas are equivalent to one barrel of oil.
However, the Alberta government is allowing gas producers to convert last year’s gas production to barrels of oil equivalent on a 10-to-one basis to raise their credit limits for the province’s drilling incentives.
Gas supply glut Even so, Lanny Pendill, an analyst with Edward Jones, said gas is a losing proposition and will be until at least mid-2010 because of the supply glut in North America, fueled largely by the flood of new gas from shale deposits and the cargoes of liquefied natural gas from projects in Australia, Saudi Arabia and Qatar that are heading for the United States.
Compounding the problems are the highest storage levels ever for this time of year in Western Canada and the U.S.
“If you’re a gas player, you’re keeping your fingers crossed and hoping for a really hot summer, followed by a really cold winter,” Pendill said.
Otherwise, he said much depends on whether the pullback in activity levels continues, or rig activity picks up as producers start hedging their 2010 production.
Drilling could be lower A research report by Calgary-based investment banker Peters & Co. said drilling in Western Canada could be even lower than the 10,000 wells it forecast a few months ago.
“For the past nine years, wells drilled in the first five months have represented an average of 37 percent of total wells drilled for that year,” the report said.
“Using this average and the approximately 3,300 wells drilled in the first five months of 2009, a projection of about 8,900 total wells in 2009 appears more likely.”
Pendill said there’s no question that the second-quarter drop of 15 percent in gas prices will affect second-quarter results, which he expects will be “quite a bit stronger” than the first quarter because of a 40 percent jump in oil prices.
But he was reluctant to comment on whether oil companies will have enough confidence in commodity prices to ramp up their second-half spending plans.
“That’s something we’re all going to be listening for (in upcoming second-quarter corporate conference calls),” he said.
EnCana may shut-in gas wells Regardless of what the government or analysts think, the industry — notably EnCana and Talisman Energy — is sending out its own negative view of where the gas sector is headed.
Randy Eresman, chief executive officer of the big independent, said in June his company may shut-in 400 million cubic feet per day (divided equally between Canada and the United States).
Talisman Chief Executive Officer John Manzoni went one step further, saying his company will consider selling off its North American conventional gas assets, if it gets a good offer, to concentrate on shale and tight gas plays.
He said Talisman is “not in a forced sale mode,” but decisions on the company’s conventional portfolio could be made later this year.
“That’s the heart of the company,” Manzoni said. “We need to consider whether we’re going to sell it, joint venture some of it, or whether we’re going to hold some of it.”
Eresman said current full-cycle gas prices “are below what is economic for any producer. We have shut-in some of our gas and in some cases we’ve chosen not to bring on new wells.”
But he did not indicate what prices would be required to bring wells back on stream.
To protect itself to the best degree possible, EnCana has locked in 35 percent of its 2010 production, about 1.39 billion cubic feet per day, at an average price of US$6.21 per thousand cubic feet — a sharp drop from its current hedges of US$9.13.
“Had we not had (the new hedges) in place, I’d be thinking about cutting down activity as early as this fall,” Eresman said. But, at gas prices of US$6, EnCana expects to earn an after-tax rate of return on gas projects in excess of 20 percent.
“The hedge position that we’re putting in place gives me comfort that we can go ahead with our capital program as it is,” he said, predicting that gas prices will fluctuate next year in the range of US$4.50-$8.50 per million British thermal units.
Trust reduces gas production Sue Riddell Rose, president and chief executive officer of Paramount Energy Trust, said the trust has reduced gas production for the first time since it was created six years ago.
“We have 15 million cubic feet per day (of Paramount’s total output of 175 million cubic feet per day) shut-in and we’re closing another seven or eight,” she said. “If we continue to produce at what we believe the price will be for the summer, even if you look at the current strip, there’s value in shutting that in and bringing it on for the winter.”
A recent Tristone Capital report suggested the North American market is over-supplied by 2 billion or 3 billion cubic feet per day, even with Canadian production down 630 million cubic feet per day in the first four months of 2009 from a year earlier.
Eresman echoed Stelmach’s warning of “dark clouds ahead” for Alberta from the emergence of U.S. shale gas, but suggested that trend may also “drive prices to levels well below what it costs to add new supplies — levels that we believe are unsustainable.”
“In recent months, drilling has slowed and over time we expect that production will decline, bringing the market back into balance. However, it is difficult to predict when that will occur and what price will emerge.”
The situation is creating its own grim humor.
In a recent presentation to money managers in Calgary, Scott Saxberg, chief executive officer of Crescent Point Energy Trust, even described natural gas as virtually an unwanted byproduct.
“Did I mention we’re 90 percent oil-weighted?” he said to some chuckles from his audience. “The other 10 percent is a wasted product — natural gas.”
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