Bad times ahead for Canadian gas producers
Life for producers of “dry” gas – as opposed to the “wet” stuff chock full of much more valuable natural gas liquids – is poised to get a whole lot worse before it gets better. “Things have been less than rosy,” Martin King, vice-president of institutional research at Calgary investment bank FirstEnergy Capital, told a roomful of energy executives this morning.
The crux of the pain is multi-faceted. The first and most obvious crimp on producers has been weather. “Obviously the winter has been a no-show,” King said. Indeed, the analyst’s presentation to energy captains this morning noted that the current heating season, already at the mid-point and all but written off by the market, began with the fourth-warmest November and December on record in 80 years. Calgary and Edmonton may be feeling an icy chill now, but the new year so far has been about 22 per cent warmer than this time last year, and about 18 per cent above temperatures considered normal.
Against a backdrop of “anemic” withdrawals this winter, U.S. shale gas production shows few signs of retreating. “The juggernaut is still going,” King said. FirstEnergy expects U.S. storage levels to exit March north of 2,300 billion cubic feet – an all-time high. By October, storage levels could climb as high as 4,100 bcf, just shy of total storage capacity of 4,230 bcf. Storage levels are also robust in Canada, according to FirstEnergy data, with surplus capacity on track to pass 200 bcf in coming weeks, putting Western Canada three months ahead of last year by the time injection season gets under way. “There’s just gas, gas, gas everywhere,” King said.
Sparse withdrawals and surging supply have AECO natural gas prices flirting with $2.50 per thousand cubic feet. In the U.S., producers will have to see prices sink as low as Nymex $2.25 before shutting in production, FirstEnergy estimates. Add to the mild weather a decision to suspend the implementation of new air pollution rules in the U.S. and sub-US$2 gas is suddenly a realistic prospect. “That is not necessarily out of the question,” King said.
Late last year, U.S. electricity producers successfully appealed new inter-state pollution rules proposed by the Environmental Protection Agency that would have compelled power plants in 27 states to begin reducing their emissions of sulfur dioxide and nitrogen oxide. A review of the appeal court’s ruling is scheduled for April. In the meantime, though, King estimates the delay will have jeopardized as much as four to six billion cubic feet of equivalent natural gas demand by 2014, or two bcf of demand this year alone.
The hold-up in implementing the clean air provisions now means that the degree to which gas-fired power demand in the U.S. grows is wholly contingent on prices getting lower, which means any upside to Henry Hub pricing won’t kick in until late 2013 or early 2014, FirstEnergy says. The investment climate spells trouble for Canadian gas producers, who could begin seeing supply shut-ins this year.
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