National Post (National Edition)
'There's a lot of crop that's going backwards'
How heat, drought are wrecking havoc on our food system. And how `heat offs' are hitting natural gas.
• As a record-setting heat wave baked the western half of North America at the end of June, Canadian natural gas producers faced an unexpected problem: It was too hot to produce the commodity in many northern fields.
Just as Texas natural gas producers weren't prepared for the blizzard that battered the southern U.S. last winter and suffered “freeze-offs,” their Canadian peers experienced “heat-offs” as temperatures rose to 40 degrees Celsius in northern British Columbia and above 35 C in Alberta.
“It went so high that it actually impacted gas supply,” said Darren Gee, president and chief executive of Peyto Exploration and Development Corp. The record-setting temperature led to record-setting demand for electricity and abnormally high natural gas prices, which could set up a bumper winter heating season.
Most natural gas plants and compressor stations are built with massive 1,500-horsepower cooling fans to allow production and processing of gas molecules in the heat.
But as temperatures rose between June 25 and June 30, some facilities in northern B.C. and Alberta were not equipped with enough cooling equipment to handle the heat and, as a result, had to shut in their production, knocking off up to 4 billion cubic feet of natural gas supply out of Western Canada.
These “heat-offs” happened at exactly the same time as electricity demand in the Western provinces skyrocketed as people took refuge from the sun by cranking up air conditioning or turning on fans.
The Alberta Electric System Operator announced the province had shattered its previous summer peak electricity demand record of 10,822 megawatts on June 28, when electric use soared to 11,512 MW. It broke that record again the next day, when electricity use hit 11,712 MW on June 29.
Natural gas power generation now accounts for 50 per cent of power generation capacity in Alberta as previously dominant coalfired generating stations have been retired or are in the middle of conversions to burn natural gas. Coal now accounts for 31 per cent of the province's electricity capacity, according to the AESO, and is projected to fall ahead of a 2030 phaseout deadline.
The combination of supply interruptions and high demand for the commodity from electric generating stations led to a leap in spot gas prices in Alberta as the AECO benchmark averaged $4.16 per thousand cubic feet on June 29.
TC Energy Corp., which operates the largest gas pipeline network in Western Canada, said that roughly 900 million cubic feet of natural gas was withdrawn from storage facilities connected to its network between June 25 and June 28. The company said in an email it did not experience equipment issues related to the heat.
Peyto's Gee estimates that from all gas storage facilities, roughly 2.1 bcf of gas was withdrawn from storage to feed demand in Western Canada — which is a highly unusual event as summer is generally considered “injection season” while gas producers try to fill storage for the winter.
“The only summer that beat this summer was 2014,” Gee said, noting that producers are expecting to see $3.50 per mcf for their gas at AECO, still below the $4.05 per mcf average producers enjoyed in 2014 but well above $2.05 per mcf last year and $1.09 per mcf the year before.
Despite the higher prices, Gee said Peyto is not looking at drilling additional wells and is focused instead on reaping the higher revenues from commodity prices to pay down debt. Analysts expect other producers to do the same.
“They're not drilling into this. Everyone is showing the same discipline as with oil prices,” Raymond James analyst Jeremy McCrea said in an interview, adding that after the past few years of low gas prices, there's a need to repair balance sheets.
Citi Group global head of commodities research Ed Morse increased his price forecasts for the American Henry Hub natural gas benchmark price by 50 cents to US$3.70 per mcf for the third quarter of this year and expects that to rise to US$3.90 per mcf in the fourth quarter.
“In the U.S. despite resilient production so far this year, a slow rise in natural gas rig counts due to a lack of appetite from natural gas producers to drill should limit U.S. production growth in the months ahead, thereby keeping the market tighter for longer,” Morse wrote in a July 8 research note.
However, Citi expects natural gas prices to slip to US$3.40 per mcf in 2022 and US$2.80 in 2023.
Still, Canadian natural gas producers can expect higher natural gas prices than in recent years because the discount they face relative to the Henry Hub benchmark has shrunk from $1.50 per mcf to 70 cents per mcf, said Cameron Gingrich, managing director of Calgary-based consultancy Incorrys.
Gingrich said that TC Energy's expansions to the Nova Gas Transmission System and long-term contracting on its export systems have improved differentials for Canadian gas and LNG exports off the U.S. Gulf Coast has also created a demand for Canadian gas to backfill supply in the Lower 48 states.
At the same time, the extreme heat and potential for a drought in the Western U.S. states is creating a situation where hydroelectricity in those states may need to be augmented by gas-fired generation, and some of that commodity will be pulled from Western Canada.
“I think for 2021, gas producers really have a right to be optimistic for the first time in a long time,” Gingrich said.
THEONLY SUMMER THAT BEAT THIS SUMMER WAS 2014.