Providing coverage of Alaska and northern Canada's oil and gas industry
November 2018

Vol. 23, No.44 Week of November 04, 2018

Canadian gas eyes rebound

Analysts, industry leaders downplay hopes of short-term gas price revival

Gary Park

for Petroleum News

Natural gas was leader of the Canadian petroleum pack through most of the 1990s and the first decade of the current century and looked set for a sustained run as proposed LNG projects piled up.

Not any more, with only a handful of LNG plans remaining active, capital spending beaten back by shale gas activity in the U.S. and commodity prices forecast to fall from a predicted C$3 per thousand cubic feet to under C$1.60 in 2019 and Bank of America Merrill Lynch warning the slide could dip under C$1 in 2020.

Encana was once the largest gas producer in North America and briefly held the largest market capitalization on the Toronto Stock Exchange.

It was so confident in the outlook for gas that it spun off its oil sands holdings into Cenovus Energy, a move it came to rue, eventually forcing it to embark on a steady rebuilding of liquid holdings.

Given that history, it’s understandable that key gas players are taking a wary view of talk that the LNG business may soon give their sector a big boost, ending years of depressed gas prices in Western Canada.

“Export (LNG) projects can’t come soon enough,” said Bank of America, noting how badly Alberta and British Columbia gas needs additional outlets.

Links could be ‘reset’

The combination of the investment go-ahead for LNG Canada, along with new tolling arrangements on the main natural gas export pipelines starting in 2020, would help “reset” the links between AECO (Alberta’s trading hub) and North American benchmarks, where AECO prices were C$2.37 per thousand cubic feet at the start of October compared with the equivalent C$4.10 Henry Hub benchmark.

If the C$40 billion LNG Canada project does proceed to completion, it will be the first major LNG operation in Canada that is expected to consume about 2 billion cubic feet per day of gas by the mid-2020s - a significant increase in Western Canada output that is currently 16.5 bcf per day.

“It does offer hope that there’s a future in this (Western Canada Sedimentary) basin,” said Gary Leach, president of the Explorers and Producers Association of Canada.

Mike Rose, chief executive officer of Tourmaline Oil, Canada’s second largest gas producer, said LNG Canada will have no impact on Western Canada prices in the short term, but should provide a lift to demand and support more robust prices once the facility is operating.

“At least getting one project going improves the psychology (of the gas sector) a little bit ... (raising hopes) that we can get pipelines and projects built.”

Development in waves

Greg Colman, National Bank Financial analyst, said in a research note that LNG development tends to occur in waves rather than isolation because “if the economics make sense for one project, they make sense for many.”

Dale Dusterhoft, chief executive officer of Trican Well Service, agreed with the views of Rose and Colman that the impact of LNG Canada “on the immediate market will likely not be great in terms of an early recovery of pricing, but if we can get this and others built behind it, it’s great for the long-term future of the Canadian business.”

He said well completions tied to the project will start to grow in 2020 as the completion date nears and producers increase exploration budgets to prove up their resources.

LNG Canada is “positive in the sense that it’s a general sentiment lift,” said GMP FirstEnergy director of institutional research Martin King, although he cautioned that the project’s first two liquefaction trains will likely not have much impact on domestic gas prices.

But the prospect of the first substantial investment in the Canadian oil patch in a long time “lifts a dark cloud that has been hanging over (Canada). It certainly gives producers something to hang their hats on.”

King estimated that between 300 million and 600 million cubic feet per day of Western Canada production has been shut down at various times this year.

National Bank of Canada analysts said LNG Canada has the potential to be the first of many LNG ventures assuming Canadian LNG follows the global trend where LNG export areas “tend to be the hubs of terminals, rather than standalone facilities.”

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