National Post (Latest Edition)

Producers decry ‘missing pieces’ in gas expansion

- Geoffrey Morga n

CALGARY • A delayed natural gas pipeline project in Alberta will impact close to $ 4 billion in planned capital spending this year, delay drilling plans and potentiall­y lead to commodity price volatility next year, say gas producers.

“We were all ver y disappoint­ed that while we’re still drilling wells and keeping the lights on,

the Canadian government couldn’t get an approval done. That’s pretty frustratin­g and it put this project back,” said Darren Gee, president and CEO of Peyto Exploratio­n and Develop

ment Corp., of what is now expected to be a year- long delay to a $ 2.4- billion gas pipeline expansion by TC Energy Corp.

The Calgary- based pipeline giant has spent $ 9 billion expanding its largest asset and Canada’s largest gas pipeline network, called Nova Gas Transmissi­on Ltd. or NGTL, in recent years.

The goal of the massive, multi- year expansion was to alleviate pinch points in critical parts of the system and allow more gas from northweste­rn Alberta to flow to trading and storage hubs in southern Alberta.

The Canada Energy Regulator recommende­d the federal government approve the project on Feb. 19, triggering a 90-day timeline for Ottawa to make a decision. But on May 19, the government opted to take another 150 days to review the project and consult with affected Indigenous communitie­s.

Now, even as a decision is expected on Oct. 19, TC Energy’s plan to put the last piece of that expansion into service at a cost of $ 2.4 billion has been delayed for a full year and Canadian natural gas producers are concerned the bottleneck­s on the NGTL system will lead to unpredicta­ble swings in Canadian gas prices.

“This was the last of the $9 billion of capital they were going to invest in the Nova system,” said Gee, adding companies in the industry are now unsure how much to drill this winter because they don’t want to overwhelm the system’s bottleneck­s next summer.

“What are producers to do? I guess we shouldn’t go drill,” he said.

The NGTL additions were planned to arrive just in time for producers, which have been struggling with low prices for years. Following the pandemic, however, competing natural gas production in the U. S. is projected to decline sharply and is setting up a better commodity price outlook for gas. The producers are concerned the opportunit­y is now in jeopardy.

Multiple natural gas executives have compared the NGTL system to a puzzle with missing pieces, and those missing pieces make it difficult for traders and producers to determine how much gas to drill, buy and sell next summer.

“There’s a reason they needed the entire system to expand and they really needed to complete that in order to prevent disarray in the market,” said Tristan Goodman, president of the Explorers and Producers Associatio­n of Canada ( EPAC), which represents small- and mid- sized oil and gas companies.

“We’re missing pieces, basically,” he said of the delay to the last piece of TC Energy’s NGTL expansion.

TC Energy had planned to begin constructi­on on a 1.45 billion cubic feet expansion to the NGTL system between Grande Prairie and Rocky Mountain House, Alta. this summer in order to have the expansion up and running in April 2021, but the federal government delayed final approvals for the project on May 19.

In an email to the Financial Post, the pipeline giant said it has now lost the summer constructi­on season and the new in- service date for the expansion is April 2022, which has frustrated Canadian natural gas producers concerned the bottleneck­s on the system will lead to the kind of gas price volatility experience­d in the summer of 2017, 2018 and much of 2019, when the AECO benchmark would frequently trade in negative territory.

EPAC’S Goodman said the industry is frustrated by the delay but understand­s that Ottawa needs to ensure it properly consults with affected Indigenous communitie­s along the route. “Yes, we are disappoint­ed but in the same sense we can appreciate why the Crown and the federal government did delay that,” he said.

Ottawa delayed a decision on the project because of the pandemic at the request of Indigenous communitie­s along the route, according to Ian Cameron, spokespers­on for Natural Resources Minister Seamus O’regan.

“It is a core responsibi­lity of the federal government to help get our natural resources to new markets and create good jobs. This is only possible when we meet our constituti­onal duty to meaningful­ly consult with potentiall­y impacted Indigenous communitie­s,” Cameron said in an email.

Gas executives said the delay is particular­ly frustratin­g as Alberta struggles with a deep recession and thousands of job losses as a result of the COVID-19 pandemic and related plunge in oil prices.

The 2021 NGTL Expansion project would have put 5,500 people to work, TC Energy said in an emailed statement.

“We remain committed to the project and continue to engage with the government to advocate the criticalit­y of a timely approval to enable us to construct to provide the essential capacity required to serve incrementa­l transporta­tion contracts and meet the growing demand for natural gas,” TC Energy said in the email.

The company also said it laid off a number of staff in its natural gas division this week “as ordinary course of operating our business” and part of the company’s continuous reviews of its operations. However, the layoffs will affect TC Energy’s gas expansions teams.

The company said it was “implementi­ng a new structure” in the Canada Gas Operations and Projects team “to ensure the optimal skill sets to navigate the next tranche of our expansion and operations.”

Altogether, the expected hit to capital spending in Alberta this year will be closer to $ 3.9 billion because the $ 2.4 billion in spending on the pipeline expansion will be delayed, and that will in turn delay $1.3 billion to $1.5 billion in upstream capital spending, said Cameron Gingrich, managing partner and strategy at Calgary- based consultanc­y Incorrys Inc.

“Between the $ 2.4 billion project and additional $ 1.5 billion in upstream spending, you’re basically deferring that in the economy by a year or so, which in a COVID world is a really tough thing to take,” Gingrich said.

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