Alberta natural gas market rallies
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Startling price surge boosted by shrinking inventories, renewed investor interest; for many industry leaders too early to celebrate
Gary Park for Petroleum News
From a desperate plight, Alberta’s natural gas prices have made a sudden rebound since mid-September, skyrocketing by 420% in response to declining inventories and a bullish supply/demand balance entering the winter heating season.
The industry mood has been further bolstered by reports of interest from investors who have bypassed the Canadian gas sector over the past two years.
But the question is whether the signs of new life are merely fleeting or too late for many companies.
Andy Mah, chief executive officer of Advantage Oil and Gas, told the Financial Post he is not yet ready to proclaim a “180-degree shift in sentiment,” despite seeing some “green shoots” linked to better access to natural gas storage facilities.
Gas prices have climbed by 77% in the first 10 months of 2019 to C$2.45 per thousand cubic feet, mcf, after starting the year at a dismal C$1.33 and often plunging below C$1 over that same period.
4 cents per mcf Even so, the rally on commodity markets has lifted the spirits of producers who have slashed drilling plans, while allowing their output to fall since prices nosedived to a staggering 4 cents per mcf in May at the province’s AECO trading hub.
Darren Gee, chief executive officer of Peyto Exploration and Development, said the turnaround has generated hope among some producers, who now feel that they can again compete with their rivals in the United States as the price gap has closed on Henry Hub North American benchmark levels in Louisiana.
He said AECO storage levels have been “dangerously low” and could be drawn down when it comes time to replenish them next summer.
Combined with an expanded storage system in 2021 there is a strong likelihood that “AECO will be a fair market again,” Gee said.
The Alberta sector is entering the withdrawal season which starts in November with storage levels 27% below the five-year average, according to analysts at AltaCapital Corp.
However, despite strengthening fundamentals, AltaCapital is sticking with its forecast average AECO price of C$1.70 through the next five months.
New gas pipeline Optimism gained a further lift on Oct. 18 when Alberta Premier Jason Kenney launched a new gas pipeline in central Alberta.
Calgary-based TransAlta celebrated the opening of its Pioneer Pipeline which is a key element of the utility company’s conversion of its coal-fired power-generations plant to natural gas.
Pioneer’s initial capacity of 130 million cubic feet per day is expected to reach 440 million cubic feet per day, which Kenney said will reduce greenhouse gas emissions in Alberta’s power production by 50%.
“This is a good day for Alberta jobs, a good day for diversifying our economy and it’s a good day for the environment,” he said.
Kenney also took a swipe at climate activists, noting they are “opposed to natural gas ... opposed to zero-emitting nuclear power ... opposed to technological solutions ... opposed to the entire modern industrial economy. Their manifesto essentially calls for shutting down our entire economy. That is not a real solution.”
TransAlta Chief Executive Officer Dawn Farrell said her company’s plan to convert five of its plants to gas-powered generation will service Albertans for 25 to 50 years, creating time for the introduction of even more renewable.
Help too late However, even if help is on the way it will likely be too late for a company such as mid-size producer Bellatrix Exploration, which has put itself on the sales block after filing for creditor protection after failing to reduce debt and improve liquidity.
Once worth more than C$2 billion, the company now has a market value of just C$15.5 million, while carrying a debt of C$357 million.
Bellatrix warned in its second quarter report its ability to continue as a going concern was in doubt and gave no guarantee it will complete a rescue transaction “given the level of secured debt obligations of the company.”
Tristan Goodman, president of the Explorers and Producers Association of Canada, said that although there are “some signs of hope,” additional bankruptcies and insolvencies in the gas industry “are a possibility.”
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