Energy Ink

Western Canada ‘jammed’ with too much gas

March 01, 2012

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Never mind 10-cent fluctuations in the price of natural gas. As production shut-ins and curtailed capital forecasts continue unchecked this withdrawal season, anxious market watchers and industry participants are beginning to suspect that the current funk is no ordinary trough in an otherwise normal cycle.

Such was the chatter at an annual natural gas conference held by the Canadian Energy Research Institute (CERI) in Calgary this week, where the talk was divided among those who think the current malaise is just another bottom, and others convinced that something more systemic is at work.

“We have a new threshold, I believe, for natural gas prices,” Mike Dawson, president of the Canadian Society for Unconventional Resources, told forum attendees. Even with production curtailments announced in recent weeks by Chesapeake, Talisman, Encana, Progress and the rest, “There’s going to be continued downward pressure” on prices, he predicted.

That drillers aren’t necessarily laying off the accelerator only adds to the burden. Production shut-ins to date amount to roughly 1 billion cubic feet per day, FirstEnergy Capital analyst Martin King wrote this week. “So far, there seems to be little to suggest that pipeline receipts have taken a real move to lower levels in either the U.S. or Canada,” he wrote Tuesday.

Another drag on the commodity lies in the gap between permitting and actually building export liquefaction capacity. At the CERI conference, Dawson suggested $3 to $5 per thousand cubic feet will be “the new reality” for gas prices, but not until such time as LNG outlets on Canada’s West Coast and on the U.S. Gulf Coast materialize. “All of those projects are probably not going to come to fruition until realistically 2015-16. We’re still going to be constrained by a very volatile, low-price environment.”

Producers in Western Canada could be especially pinched. New pipeline capacity added in recent years out of the U.S. Rockies (see here, here and here) means Alberta and British Columbia exports are increasingly expendable, Edward Kallio, director of gas consulting at Ziff Energy, told the industry crowd. “Western Canada used to be that continental connector,” he said. “We could cover a shortfall anywhere.”

Now, gas is bottled up in Alberta, held back by steep transportation tolls on the TransCanada Corp. mainline, and weighing on prices. “It’s not clearing our basin,” Kallio said. “It’s chasing its tail. We’re jammed with storage.”

If nothing else, the situation should make for a lively hearing process as TransCanada’s mainline tolls are once again thrust under the microscope.

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