There are big bets down on the Western Canadian Sedimentary Basin, but the most unpredictable factor for success will be timing
Demand for Canadian gas is retreating, yet TransCanada is still building out its pipeline network
WHEN I FIRST HEARD THAT TRANSCANADA
was increasing its takeaway capacity out of Alberta by some four billion cubic feet of natural gas per day (bcf/d) over the next two years, I thought “Who is going to buy that gas?” The markets for Canadian gas are shrinking, not growing. The industry is well aware that cheap natural gas from the Marcellus is now going into Ontario, the U.S. Midwest and the Gulf Coast. RBN Energy says there are more than 30 new egress options for Marcellus gas coming in the next two years.
My understanding is that TransCanada is asking for eight-year commitments on this new line. That is a long way out, and would amount to a big risk for producers in a very uncertain time. Gas prices are low now and dipped even lower during the warm North American winter of 2015-2016.
Like the entire Canadian gas market, this is a binary trade on LNG exports. It’s a one or a zero. TransCanada says this gas is for LNG and oil sands markets. But prices for both commodities are very low – so low that bitumen is now sometimes under $10 per barrel and you have to wonder how long it will be before some large producer cries, “Uncle!”
LNG exports from Canada’s West Coast will not be online in time for when these expansions are ready in 2017 and 2018. It takes 48 months to build one of the large land-based natural gas export terminals being planned for Kitimat or Prince Rupert – and the clock has not yet started ticking on any project – so we’re looking at 2020 at the earliest. There is a small chance that Altagas will get its floating LNG ready by then, but... that’s Altagas. They already have pipeline relationships. And at less than 600 million cubic feet per day, there is no real benefit to the shippers.
So initially this gas will be going into a very well-supplied North American market. But not all of this four bcf/d is new expansion capacity. The hotspot of the Western Canadian Sedimentary Basin for gas has been the Montney for several years now, which is farther west than legacy production. You don’t remove old capacity, you just keep it there until there is some reason to use it again. There is increasing amounts of empty capacity in the eastern Alberta plains, where conventional gas is just not economic.
But new pipelines do have to go where the new gas is, and with the Montney up to six bcf/d now, that’s the place to go. And really, only 1.7 bcf/d is going to be for domestic markets, while 2.2 bcf is reserved for Progress Energy and their LNG project on the West Coast. That LNG arm won’t get built if the project doesn’t go ahead.
Lastly, some producers are able to make money on the forward strip. I talked to two producers in late January who told me they are receiving $3.40-per-thousandcubic-feet (mcf) pricing for 2018 gas, once they include a small premium for some extra heat content in their gas.
So who is going to buy that gas? Hopefully Asian buyers will be found for 2.2 bcf/d of it through an LNG industry that will certainly take up every available worker in Western Canada. And if the rest is now being hedged out at $3.40/mcf – a price at which producers make good money – then the industry isn’t going out on a limb as much as I thought.