Alberta power firms betting on cheap gas to replace coal
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.”