Al­berta power firms bet­ting on cheap gas to re­place coal

Calgary Herald - - FRONT PAGE - CHRIS VAR­COE

As Al­berta closes the door on coal, an­other may be open­ing for large com­pa­nies look­ing to con­vert their power fleet to nat­u­ral gas. Cal­gary-based Tran­sAlta re­cently an­nounced it would con­vert sev­eral of its coal-fired plants to gas and a num­ber of oth­ers are con­sid­er­ing fol­low­ing suit, with a glut of nat­u­ral gas keep­ing prices low.

In sports, ev­ery time some­one wins, some­one else loses.

The same is of­ten true in busi­ness, although com­pa­nies of­ten tout the win-win.

The jury, how­ever, is still out on nat­u­ral gas.

Western Canada is see­ing more pro­duc­tion com­ing from pro­lific plays like the Mont­ney. That means there will be am­ple, cheap sup­plies for years to come.

The trend, how­ever, could crimp returns for all gas pro­duc­ers and the province for sev­eral years if pro­posed liq­ue­fied nat­u­ral gas (LNG) projects off Canada’s west coast don’t go ahead and pro­vide new mar­kets for the re­source.

But lower prices mean there are po­ten­tial wins for large gas con­sumers, such as power gen­er­a­tors look­ing to con­vert their coal-fired power fleet to burn gas.

“Trends don’t last for­ever, but there is cer­tainly, cur­rently, an over­sup­ply and a po­ten­tial to over­sup­ply (gas) in al­most ev­ery mar­ket in North Amer­ica,” Tran­sAlta CEO Dawn Far­rell said Mon­day.

“When you look in north­east­ern B.C., and north­ern Al­berta, there’s tons of gas and it’s not get­ting out of here with LNG. It’s get­ting blocked into the basin.”

Cal­gary-based Tran­sAlta re­cently an­nounced it will con­vert sev­eral of its coal-pow­ered plants to gas. Other play­ers, in­clud­ing ATCO and Cap­i­tal Power, are con­sid­er­ing their op­tions.

For Tran­sAlta, three of its Sun­dance coal-fired units and two at its Keep­hills plant will make the trans­for­ma­tion to gas be­tween 2021 and 2023.

One of the driv­ing forces be­hind this tran­si­tion is the Not­ley govern­ment’s de­ci­sion to phase out all coal-fired elec­tric­ity by 2030, part of the province’s strat­egy to re­duce green­house gas emis­sions.

For Tran­sAlta, there are also dis­in­cen­tives to keep burn­ing coal at these plants in the next decade, such as ris­ing car­bon taxes.

Far­rell noted western Cana­dian gas, which is a lower-emit­ting fuel source than coal, of­fers a cost-ef­fec­tive al­ter­na­tive. To­tal cap­i­tal costs for the plant con­ver­sions are es­ti­mated at $300 mil­lion.

Mean­while, nat­u­ral gas prices in Al­berta are far­ing bet­ter than the bru­tal lows wit­nessed last spring, but the out­look re­mains some­what con­strained.

“There is a lot of cheap gas,” de­clared Cana­dian Energy Re­search In­sti­tute CEO Al­lan Fog­will, not­ing the shale gas rev­o­lu­tion in the United States has cut deeply into tra­di­tional mar­kets for Cana­dian pro­duc­ers.

“There is a much stronger sup­ply than de­mand, so it’s a buyer’s mar­ket.”

GMP FirstEn­ergy is fore­cast­ing bench­mark Al­berta gas prices at the AECO hub will re­main be­low $4 per thou­sand cu­bic feet un­til the end of the decade.

“These prices we see right now have a ceil­ing on them, be­cause of the size of the re­source base in North Amer­ica and just how much gas you can ac­cess,” said an­a­lyst Martin King of GMP FirstEn­ergy.

As drilling and pro­duc­tiv­ity lev­els have picked up, Cana­dian gas out­put has risen to about 15.4 bil­lion cu­bic feet per day this year from 14 bcf/day in 2012.

King be­lieves power gen­er­a­tors build­ing new gas-fired fa­cil­i­ties or con­vert­ing off coal could in­crease gas de­mand in the province by 1.5 bcf/day in the 2025 pe­riod.

All of this doesn’t mean gas pro­duc­ers with great plays and low costs won’t make money; the strong­est al­ways sur­vive. But it does mean the mar­ket will be even more com­pet­i­tive mov­ing forward.

Cameron Gin­grich, direc­tor of gas se­ries for Solomon and As­so­ci­ates, noted Western Canada has some of the most eco­nomic gas on the con­ti­nent from the Mont­ney, and there’s still a mas­sive re­source base to tap.

“All these pro­duc­ers have done a great job us­ing tech­nol­ogy from hor­i­zon­tal wells and pin­point frack­ing and are now scram­bling to find a mar­ket. So pro­duc­ers who can’t find a di­rect way to mar­ket their gas and mon­e­tize it will be left be­hind,” he said.

Gin­grich pre­dicts there will also be new opportunit­ies for buy­ers, in­clud­ing power pro­duc­ers, petro­chem­i­cal fa­cil­i­ties, fer­til­izer plants and other large con­sumers “look­ing to take this low-cost feed­stock and do projects and de­velop in­fras­truc­ture.”

Of course, there are other con­sid­er­a­tions at play for elec­tric­ity gen­er­a­tors than just cheap and avail­able sources of fuel.

The province needs re­li­able power sup­ply as it phases out coal and adds more in­ter­mit­tent re­new­able energy, such as wind and so­lar, onto the grid.

Sev­eral Al­berta com­mu­ni­ties rely on coal-fired plants and mines for jobs. Con­vert­ing plants to gas would help keep some em­ploy­ment in place.

Ex­ist­ing coal plants also have in­fras­truc­ture in place to move power onto the grid with­out ex­pen­sive cap­i­tal in­vest­ments.

“Con­ver­sion to gas on these coal fa­cil­i­ties is, I think, a very el­e­gant tran­si­tion plan as the province moves to non-emit­ting sources of elec­tric­ity,” ATCO Ltd. chief strat­egy of­fi­cer Siegfried Kiefer said in an in­ter­view.

Ed­mon­ton-based Cap­i­tal Power is also an­a­lyz­ing its op­tions, but wait­ing to see new fed­eral reg­u­la­tions deal­ing with coalto-gas con­ver­sion and re­lated emis­sions rules, said com­pany spokesman Martin Kennedy.

There are still ques­tions to be an­swered, num­bers to crunch, de­ci­sions to make.

But Al­berta has plen­ti­ful, cheap gas, while power gen­er­a­tors need the re­source as they move away from coal.

“We are tak­ing a bet that we would rather take ad­van­tage of that gas be­ing in the mar­ket early than hope that it’s there in 2030,” Far­rell con­cluded.

“So that’s a big, big, big piece of the play.”


“… There’s tons of gas and it’s not get­ting out of here with LNG,” says Tran­sAlta CEO Dawn L. Far­rell.

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