Providing coverage of Alaska and northern Canada's oil and gas industry
August 2019

Vol. 24, No.34 Week of August 25, 2019

Glimmer of hope for gas

Alberta electricity producers start switch from coal to gas fired power plants

Gary Park

for Petroleum News

Two of Canada’s largest electricity generators are giving a lift to Alberta’s hard hit natural gas sector by converting more of their coalfired facilities to consume gas.

And even more of Alberta’s existing energy only electricity market could join the trend once the provincial government embarks on a promised plan to tackle some of the electricity sector’s fundamental issues.

For now, the move to change is being led by Calgary based TransAlta, which has 70 power plants in Canada, the United States and Australia that are currently 52% fired by coal, 22% by gas, 13% by wind, 11% by hydro and 2% by geothermal, and Capital Power Corp., a multinational operation with capital assets estimated at C$450 billion.

TransAlta Chief Executive Officer Dawn Farrell said the conversion of her company’s coalfired plants may stop short of a wholesale switch. Instead TransAlta will favor hybrid plants.

“Our view is that fundamentally (there will be a carbon tax) over the next 20 years no matter what,” she told analysts. As a result, she said, TransAlta “cannot get off coal fast enough … and gas right now is extremely inexpensive.

“So our coal to gas strategy is completely predicated on our belief that it’s not smart to be in carbon intensive fuels for the future,” Farrell said.

Capital Power Chief Executive Officer Brian Vassjo said the Edmonton based company plans to spend C$50 million over the next two years to introduce gas at the giant Genesee complex south of Edmonton where it is 100% owner of two stations and joint owner of a third with TransAlta. It is expected to start construction of two more units this year.

Vassjo said Capital Power expects to burn coal in the winter when natural gas prices are high and gas in the summer when prices are “real low.”

Cost of switch questioned

The government of Premier Jason Kenney has shelved plans to redesign its electricity system, asking the Alberta Electric System Operator to spend the next year trying to determine if changes to the existing market, which sets a price cap of C$999 per megawatt hour, MWh, are needed. In 2016, AESO said the province under the New Democratic Party government of Premier Rachel Notley was examining raising the cap to C$5,000 per MWh as it targeted a phaseout of coalfired power by 2030.

The AESO said such a switch was “unlikely to be successful in attracting investment due to increased price volatility” at a time when the Kenney government has scaled back forecasts for future generation needs.

While that juggling continues, gas producers are turning for help to Kenney’s United Conservative Party government at a time when their commodity has traded from a staggering low of 3 cents per thousand cubic feet to just over C$2 at the AECO trading hub in Alberta.

Gas production dropping

A new note from Raymond James reported that Canadian gas production was 14.1 billion cubic feet per day in the first week of August, down 1.5 bcf per day from a year ago and 2.1 bcf per day from March this year.

Phil Hodge, chief executive officer of Pine Cliff Energy, told the Calgary Herald there is a clear recognition from the Kenney government that gas can “play a pretty significant role in the overall health of the province. And we’re going through a pretty rough patch here.”

Raymond James analyst Jeremy McCrea said the gas sector is “on a lot of life support. There are some real concerns here that things need to get better ... and soon.”

That comes amidst a round of meetings between Alberta Associate Natural Gas Minister Dale Nally and five producers on issues confronting the industry.

Nally said the government is pondering various actions to minimize price volatility and restore confidence in the sector.

But he noted the gas industry is “complex with many competing interests, which makes it challenging to find solutions that will be supported across the sector.”

McCrea said there would not be “nearly as much buy in” for curtailments in gas markets as there was for the cutback of Alberta crude volumes, “so the government is in a bit of a tight spot.”

Underscoring the tangle facing the government, in mid July a group of nine Alberta producers issued an open letter demanding the province support a plan under which royalty credits would be issued to producers who voluntarily cut production to boost low commodity prices at a time when supply swamped pipeline capacity.

Big hope LNG

The big hope for years was the prospect of up to 20 LNG projects going ahead in British Columbia, an extravagant goal that was suddenly tripped up by mounting opposition and regulatory delays to projects at the same time the list of global LNG projects started shrinking.

One development worth following is being led by Greg Kist, who was president of Pacific NorthWest LNG, a venture operated by Malaysia’s Petronas, when it was cancelled in 2017.

Krist had left his post three years earlier and taken time to “decompress,” from which he has emerged as president and chief executive officer of Rockies LNG Partners, a consortium of gas producers who hope to attract partners to build and operate a 12 million metric tons a year operation to come on stream in 2026, requiring an investment decision by the end of 2021.

Success in the Montney

Despite Western Canada’s imbalance of gas production that is weighted in favor of “dry” gas, there has been success in pursuing the associated light petroleum liquids in the Montney formation that crosses the Alberta British Columbia border.

One byproduct is condensate, which is vital to dilute oil sands bitumen, allowing it to flow in a pipeline, and has seen output rise to 417,000 barrels per day in March from 150,000 bpd four years earlier.

However, Ian Archer, associate director of North American natural gas with IHS Markit, noted that if condensate accounts for 30% of a gas well volume and 50% of the revenue, that still leaves producers with 70% “they have to deal with.”

In as many words, the gas sector can’t win for trying.

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