Producers seek end to gas allocation battle
Producers propose voluntary reduction of output in exchange for royalty credits
CALGARY Natural gas companies in Alberta have pitched the provincial government on a plan to voluntarily limit production even as their oil-focused counterparts are looking for a way out of the limits imposed on them.
A group of five natural gas producers — Encana Corp., Tourmaline Oil Corp., Jupiter Resources Inc., Nuvista Energy Ltd. and Peyto Exploration and Development Corp. — as well as TC Energy Corp., the largest gas pipeline operator, have been meeting with provincial government representatives since the beginning of the year to work out a solution on how to fix the beleaguered gas industry.
The talks have touched on a range of issues, but the biggest and most fractious has been how to resolve a two-year fight between the gas producers and TC Energy, previously called Transcanada, over how the pipeline giant allocates space on its Nova gas system when certain lines are down for maintenance.
The producers say TC Energy limits their access to storage during maintenance, which results in wild swings in the AECO benchmark natural gas price and lower and/or unpredictable gas royalties for the province.
The battle has also exposed deeper divisions within the natural gas industry, with some producers demanding TC Energy make immediate changes, others asking the provincial government to force through a solution, and still others advocating for the government to stay out of it and let market forces do the work.
After months of infighting, a truce between the producers and TC Energy has now been reached and, sources with direct knowledge of the matter say, a proposal is before Dale Nally, associate minister of natural gas, that would allow producers to voluntarily scale back production during maintenance periods on TC Energy’s pipelines in exchange for royalty credits.
“These changes will result in an improved line of sight, especially for natural gas producers to plan their capital programs, thereby increasing future employment and investment in Alberta,” Advantage Oil and Gas Ltd. chief executive Andy Mah said, adding the plan “is not a curtailment” on production.
The government has said it is moving quickly on the plan, but industry is concerned that some companies could fail and further swamp the province’s energy regulator with clean-up bills if a system is not in place before the fall. One company that has already gone bankrupt is Trident Exploration Corp., which in early May saddled the province’s energy regulator with the task of cleaning up thousands of wells.
“We are evaluating a variety of options for natural gas, all of which are aimed at minimizing price volatility and restoring confidence in our industry. At this stage, we won’t close any doors on our efforts to revitalize Alberta’s natural gas sector and get a fair price for our resources,” Nally said in an email, adding he appreciates “there is a sense of urgency” in finding a solution.
That sense of urgency has intensified in the past eight weeks as the local AECO price cratered. For example, AECO prices on June 20 slipped into negative territory, with gas producers paying spot market customers an average of 11 cents per gigajoule, because TC Energy had limited access to the Nova system due to maintenance issues.
TC Energy is spending $1.5 billion to expand the system and alleviate the capacity constraints in the market. Additional expansion phases are planned and the company is working to add 3.2 billion cubic feet of gas capacity to the system by the end of 2021.
“There should be nothing of higher urgency or higher importance at this stage” than finding a solution to the gas price crisis in the province, said Bonavista Energy Corp. chief executive Jason Skehar, adding, “there’s more than just Trident out there” on the brink of collapse.
Like the oil industry under the provincially mandated production limits, the natural gas industry is deeply divided over whether and how to fix the problems it faces.
At one end of the spectrum, Paramount Resources Ltd. has advocated for an across-theboard mandatory curtailment for gas producers similar to the one forced on oil companies in December 2018 in a bid to lift domestic heavy oil prices.
“I’m generally not in favour of intervention in our industry and looking for governments to solve our problems, but in this particular case, I am in favour of curtailments in natural gas just like I was in favour of curtailments for oil,” Paramount chief executive Jim Riddell said.
Other large producers including Encana, which did not respond to a request for comment, have pushed back against government intervention, either because they have integrated supply chains and can better weather lower prices or because they market all their gas beyond the AECO market.
The proposed solution is between those two extremes.
“We were trying to find middle ground of accomplishing the objectives on the one hand of managing supply with the objectives on the other hand of being unaffected if you don’t want to be, which is how we came up with this,” said Jupiter Resources chief executive Simon Bregazzi said.
In practice — if implemented — producers will volunteer to shut in gas production on certain dates. If and when TC Energy needs to close its lines or restrict access to Nova, volunteer producers will be called upon to shut in their wells and the government will provide a full or partial royalty credit in exchange.
TC Energy would not confirm whether it had agreed to support this system, but confirmed it would “continue to have productive dialogues with the government of Alberta and with broader industry participants” on ways to support and revive the gas industry.
During recent maintenance periods, Bregazzi said about 500 million cubic feet of gas per day had to come off the Nova system in order to balance the market, which supplies 12.5 bcf/d of gas.
As a result, he said, the voluntary system is capable of curtailing enough gas to prevent AECO price collapses.