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Canadian gas producers remain edgy Despite increasingly bullish outlook for commodity prices and North American demand, companies pay down debt rather than drilling Gary Park for Petroleum News
The fire-ravaged region of Interior British Columbia has just hit Canada’s all-time high recorded temperature of 120 degrees, while readings of around 105 degrees have been common over the past month.
These so-called “heat offs,” which climate forecasters expect will be commonplace during future summers, are creating an unexpected problem for Canada’s natural gas producers, who are also a key year-round supplier to the western United States.
Darren Gee, chief executive officer of Peyton Exploration and Production, said the temperatures climbed so high that they “actually impacted gas supply.”
The industry estimates that withdrawals from gas storage facilities were about 2.1 billion cubic feet in late June and believe those numbers have been surpassed in recent weeks - an unusual event for Canada’s summer which is generally seen as the “injection season” as producers concentrate on rebuilding storage for winter.
Gee said producers expect to reap returns of at least C$3.50 per thousand cubic feet at the AECO trading hub, short of the average peak of C$4.05 in 2014, but well above the C$2.05 in 2020 and C$1.09 in 2019.
TC Energy, which operates the largest gas pipeline system in Western Canada, said it has not experienced equipment issues related to the heat.
Higher returns Cameron Gingrich, managing director of Calgary-based consulting firm Incorrys, said Canadian producers can expect higher returns than in recent years because the discount they face relative to the AECO price compared with the Henry Hub benchmark has shrunk from C$1.50 per thousand cubic feet to C$0.70.
He said TC Energy’s expansion of its Nova Gas Transmission System, the key gas-gathering network in Western Canada, and long-term contracting on its export systems have improved differentials for Canadian gas and LNG exports off the U.S. Gulf Coast and created a demand for Canadian gas to backfill supply in the Lower 48 states.
The demand for gas in regions of the western U.S. is likely to soar unless the extreme heat makes an unexpected decline and there is relief from drought in those states.
But the current trend points to growing demand for electricity fired by natural gas, some of which will be obtained from Western Canada.
Drilling vs. balance sheet repair Regardless of these shreds of optimism, Gee said his company has no plans to drill additional wells, concentrating instead on higher commodity prices to pay down debt.
Raymond James analyst Jeremy McCrea agreed there is a need among production companies to repair balance sheets by demonstrating financial discipline.
Ed Morse, global head of commodities research at Citi Group, said that despite forecasts of Henry Hub prices rising to US$3.90 per thousand cubic feet, Citi expects a retreat to US$3.40 in 2022 and US$2.80 in 2023.
He said that regardless of resilient prices this year, there has been only a slight increase in rig counts because gas producers lack the appetite to drill, thus limiting production growth in the U.S., “keeping the market tighter for longer.”
The firm of Rosenberg Research & Associates said the use of gas to generate electricity has stagnated over the last 15 years, but climate-change considerations will ensure gas remains a “crucial part of America’s power system for years to come.”
A recent study by Columbia University’s Center on Global Energy Policy found that “investing more in the domestic natural gas pipeline network could help the U.S. reach net-zero emission goals more quickly and cheaply.”
Rosenberg said the outlook for U.S. natural gas looks positive because of high demand for power generation and solid exports, although commodity prices “have yet to hit levels that are going to entice new production right away.”
The firm said it is not clear whether expectations of rising gas output next year after a flat 2021 will be sufficient to match the expansion needed in the U.S. and globally.
It said global equity investors “should note that the countries with the highest proven reserves of natural gas include the U.S. (in the top five), Canada and Norway (top 20) and Australia (top 30).”
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