Canada’s sinking natural gas sector
For Petroleum News
Canada’s natural gas sector is headed for its worst combined financial loss in six years, the Conference Board of Canada has predicted.
The precipitous fall in gas prices and the slump in by-products such as propane and butane could result in layoffs next year as companies are forced to take cost-cutting measures, said board economist Carlos Murillo.
He expects gas producers will follow the lead of the upstream oil industry by reopening contracts with service providers, while rolling back other expenses, in a drive to regain profitability in 2016.
The board warns that domestic gas companies will post an aggregate pre-tax net loss of C$1.5 billion this year, making 2015 the least profitable year for the sector since a dramatic dive in gas prices in 2009.
And Murillo said the dependence of gas producers on natural gas liquids has taken a sharp setback, with the price of propane in negative territory for significant portions of 2015, with producers extracting so much unwanted propane that they need to pay midstream companies to take it away, rather than get paid for the commodity.
Peyto Exploration & Development said in its third-quarter results that the price it received for NGLs had fallen sharply and was impacted “by negative propane prices in the quarter” which it expects to “persist for the remainder of the year and into 2016.”
Role of NGLs changedMurillo estimated that 30-40 percent of gas producers’ revenues are being derived from NLGs.
The role of NGLs has changed over recent years because so many companies are working in shale gas formations, which yield a higher share of NGLs than conventional gas volumes, with many of the formations now referred to as “liquids-rich gas plays.”
The board said the dismal cash flows will result in an investment pullback in the gas extraction industry as some of the largest gas producers - Encana, Enerplus and Tourmaline Oil - trim their capital budgets by an average 21 percent in 2016.
Canadian Natural Resources, Canada’s largest gas producer, has issued a preliminary budget for next year of C$4.5 billion to C$5 billion, compared with this year’s C$5.4 billion - with a large share of the spending allocated to oil and oil sands - and has left little doubt that it is prepared to reel in that program if the situation worsens.