CASHING IN ON A DEEP FREEZE
Canadian gas producers step in to meet rare demand spike in wake of U.S. outages
Canadian natural gas producers are sending huge volumes of the commodity to the U.S., which is currently mired in a deep freeze that has caused rolling power outages and record-setting spikes in both gas and electricity prices.
“It's more than just a cold streak,” Jeffrey Tonken, president and CEO of Calgary-based producer Birchcliff Energy Ltd., said of the Arctic blast that has led to freezing conditions as far south as Texas. He said the deep freeze has knocked out U.S. gas supplies and is causing a huge drawdown in gas storage, leading to a “structural change” for an industry that is now seeing demand outstrip supply — a rare occurrence.
Natural gas production in the U.S. has fallen by as much as 17 billion cubic feet per day, an 18-per-cent drop compared to a month ago, because oil and gas wells in Texas are not properly winterized so they are freezing and being shut in, according to estimates from IHS Markit.
Natural gas production was already five bcfd lower in the U.S. at the beginning of 2021, when production averaged 91 bcfd, than a year ago because of the COVID -19 pandemic, which caused a drop in oil and gas prices and forced many U.S. shale and conventional producers to shut in their wells.
Indeed, the prolific Permian Basin's second-largest oil producer Occidental Petroleum Corp. announced a force majeure Tuesday, confirming that oil and gas deliveries in Texas would be affected by the icy weather.
Regulators in Texas issued an emergency notice in the middle of the blizzard on Friday that natural gas supplies should be prioritized for human use, such as heating houses and powering the electric grid, rather than industrial uses. In the following days, major refineries in the U.S. Gulf Coast announced they were shutting down, knocking 3.1 million barrels per day of refining capacity offline, Bloomberg reported.
As U.S. production drops and shortages of natural gas roil the power markets in multiple states, Canadian producers are sending huge volumes of gas south and pocketing windfalls from elevated commodity prices. The number of rigs drilling for natural gas is at its highest level since March 2018.
The gas-focused rig count was up to 70 rigs on Tuesday, compared to 63 at this time last year, according to the Canadian Association of Oilwell Drilling Contractors.
On Tuesday morning, Tonken said Birchcliff was selling gas into the NYMEX pricing hub for US$10 per thousand cubic feet and into the AECO hub for $5.78 per mcf. Both prices represent massive upside for Birchcliff, whose budget is built on the assumption AECO prices would average $2.75 per mcf this year.
“You're so far above where you budgeted that the cash flow is material,” Tonken said, adding that for every additional US10 cents at the NYMEX gas hub, his firm's annualized cash flows rise by US$7 million.
Birchcliff, which has no commodity hedges in place and is enjoying the full upside of higher natural gas prices, traded up 3.7 per cent to $3.37 Tuesday, leading other Canadian natural gas producers.
Canadian gas producers are exporting about 7.5 billion cubic feet of natural gas per day, up roughly 25 per cent from last month when Canadian gas exports ran about six bcfd, according to IHS estimates. In December, Canadian gas producers shipped 5.6 bcfd to American markets.
“There are very high levels of exports to the U.S. right now,” said Ian Archer, IHS Markit director covering North American natural gas markets, who added the natural gas being shipped from Canada to the U.S. is creating “a big sucking sound” that's drawing down Canadian storage levels.
At the beginning of the winter season, Canadian gas producers had squirrelled away 785 bcf of natural gas into storage, which marked the highest levels in a decade. By the end of this winter, Archer said he expected 465 bcf would be drawn out of storage leaving levels below their five-year average at 320 bcf.
“That's the biggest number that we've seen in a really long time. That would be a signal that there's been a huge decline in storage inventories and we need to refill this,” Archer said.
Archer said IHS Markit now expects the NYMEX gas benchmark to average US$3 per million British thermal units in 2021, and Alberta's AECO price would likely trade about US50 cents below that price.
Advantage Oil and Gas Ltd. president and CEO Andy Mah said producers in Canada are resisting the lure of higher prices and won't rush to drill significantly more wells in response to current commodity prices.
“We're here to make money and profit rather than just growth,” Mah said, adding that his company's plan is to use the additional money from higher natural gas commodity prices to pay down debt to the point its debt is equal to its annual cash flows.
Mah said that if natural gas producers can stay disciplined and return some of the money they are currently making to shareholders, then they will be able to re-attract some of the investors who have exited the industry in recent years.
That would be a signal that there's been a huge decline in storage inventories and we need to refill this.