SMART MONEY

There are big bets down on the Western Cana­dian Sed­i­men­tary Basin, but the most un­pre­dictable fac­tor for suc­cess will be tim­ing

Alberta Oil - - CONTENTS - BY KEITH SCHAE­FER

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.

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