Board lone voice among gas forecasters

Conference Board of Canada forecasts 36% rise in ’10 gas prices, others scramble to revise down; board expects 20% profits gain

Gary Park

For Petroleum News

The Conference Board of Canada has a dose of good news for natural gas producers, predicting a 36 percent hike in prices from the 2009 low, doubling profits after a 65 percent plunge last year.

But board economist Todd Crawford said the gains won’t have much impact on drilling activity “as Canada continues to ride out the remaining effects of the recession.”

The board is a lone voice in predicting a price rebound, with Martin King, vice president of institutional research with FirstEnergy Capital, telling producers to expect prices to remain in the doldrums because the volume of working gas still in storage in Western Canada is “troubling to say the least.”

The board expects 2010 prices to average C$5.44 per thousand cubic feet at Alberta’s AECO trading hub and to make a strong increase through the forecast period, reaching C$9.30 by 2014 because of rising demand for cleaner, inexpensive sources of fuel, along with falling North American supplies, which Crawford said should keep inventories in balance.

Canada’s production sector should see profits grow by 20 percent from 2009 to C$5.9 billion, regaining some of the punishing decline last year.

“Profits responded quickly to low prices in 2009, falling 65 percent to C$2.1 billion,” said the board’s report. “The result could have been even worse were it not for the industry’s ability to curtail investment spending and cut costs in a timely manner.”

Costs are expected to rise again this year, but not as rapidly as revenues because of weak investment that will last at least one more year, the board said.

However, it is counting on costs almost doubling over the 2010-14 period, keeping the average annual growth in profits under 10 percent.

The forecast was completed before the Alberta government made its gas royalty adjustments, but the board doubts those changes will have much impact on the 2010 forecast.

“On the production front, laggard effects from low drilling levels last year will push production down once again in 2010. Revenue growth will be unable to keep up with prices, expanding just 21.8 percent to C$47.8 billion,” the independent research organization said.

Revenues will largely remain in lock-step with price movements over the next four years, but will increase at a slower overall pace as a result of declining production, reaching C$56.6 billion in 2011, then average 11.7 percent annual growth to reach C$78.8 billion in 2014.

Production will follow an 8.3 percent decline in 2009, with a 2 percent drop this year, easing to a 1.1 percent decline for the balance of the forecast period.

But the outlook in Alberta is grim for smaller pools that represent 72.6 percent of remaining discoveries in the province, while accounting for only 14 percent of remaining reserves.

The report said competition with the oil sands sector for materials and labor, combined with a fall in initial productivity, will result in average annual declines of 3 percent in Alberta.

Trailing a 30 percent decline in 2009, spending on capital and materials is predicted to rebound by 12.9 percent this year to C$41.9 billion, recovering about 1,600 lost jobs; strong wage growth in 2009 will fuel a rise in labor costs.

An increase in per unit costs of production, notably in Alberta where initial well productivity is shrinking, combined with higher royalty payments, will contribute to a 21.6 percent increase in material costs to C$23.8 billion in 2010.

The recovering strength in profits in the final quarter of 2009 is expected to remain on track in 2010, with revenues on average outpacing costs by a slight margin between 2011 and 2014 for an average annual increase of 9.1 percent to C$8.3 billion by 2014 — still short of the record year in 2005.

Record February storage

He said cumulative withdrawals appear to be falling short of FirstEnergy’s “previous aggressive expectation and (are) possibly the slowest in the past decade.”

King conceded that FirstEnergy’s bold forecast of total withdrawals for February and March of more than 100 bcf and possibly as high as 125 bcf “now looks completely laughable … nay, downright embarrassing. We will be lucky if we generate even a quarter of the 125 billion cubic feet withdrawal we so brashly forecast a little more than one month ago.”

He said FirstEnergy is troubled by the fact that the “relative level of storage in Western Canada has usually been a good short-term predictor of bearish or bullish direction in the marketplace.”

“Needless to say, with western storage already starting to fill in March, storage at record high levels and overall cumulative withdrawals falling well short of expectations as the current heating season nears an end, the price bear signals from this ‘indicator’ are rather blinding.”

Price reductions in forecasts

AJM Petroleum Consultants also expects to downgrade its 2010 gas price forecast, suggesting the balance of 2010 will see New York Mercantile Exchange and AECO below US$5, compared with its December target of US$5.75 Nymex and C$5.80 AECO.

Richard G. DeWolf Consulting is calling for a Nymex price of US$4-$5 and AECO of C$3.50-$4.50 per gigajoule as a continued recession in the U.S. and Canada acts as a drag on demand.

Of the other forecasters, Macquarie Capital markets Canada is targeting AECO levels of C$4.30 in 2010 and C$4.90 in 2011, both down more than C$1, and a Nymex average of US$4.55 per million British thermal units this year and US$5.10 in 2011, while Scotiabank Group has its Nymex sights on US$5.50 per million Btu in 2010 and 2011.