Capitalist $$$ Invade Canadian Gas Field
Canadians are being told --- by American investors on the prowl
for pieces of the action --- that the North American natural gas
market is headed for a spell of very tight supplies and they stand
to be prime beneficiaries. The projection emerged as a consensus at
a Calgary conference billed as the mightiest assembly of financial
muscle ever held in the Canadian gas capital.
A Florida-based investment house --- Raymond James &
Associates Inc., the top off-Wall Street brokerage, with about
1,400 offices including a busy one in Calgary --- took north 16
specialty houses in private placements of sophisticated investor
funds as "energy capital providers." The group, ranging from E.M.
Warburg Pincus and Energy Spectrum Partners to Southern Energy
Capital Group and Stratum Group LP, collectively counted assets of
US$14.4 billion, including $9.9 billion looking for new homes. Most
already had satisfying experiences of dabbling in Canada, across a
full range of sectors from exploration and production to seismic
surveying and industrial catering.
In the collective view of Canada, chief investment officer James
Spann from the Dallas office of Energy Spectrum Partners was
typical. The firm is a believer in Canadian gas: "It's a solid
story...really it's only just begun." Spectrum just laid out C$26
million (US$18 million) for a 57% stake in a new entry into gas
gathering and processing, Canadian Midstream Services Ltd., which
has quickly accumulated Alberta assets and expects to announce soon
a new acquisition on the drilling frontier in northeastern British
Columbia. "We don't think U.S. production is going to be there to
meet demand," added Spann, whose firm also has interests in East
Texas gas processing and gathering.
Will Honeybourne, Houston managing director of First Reserve
Corp., agreed "we see a lot of upside potential" in Canada after
gas export revenues achieved an annual growth rate of 20% as
volumes doubled and prices firmed in the 1990s.
The potential is for big and fast gains, in the calculations of
Raymond James senior analyst Wayne Andrews. From his desk in
Houston, Andrews sums up the gas outlook with a famous phrase from
the days of the space race: "Houston, we have a problem."
Andrews' charts of production data from state agencies suggest
U.S. output dropped by 5.7% in 1999 to 41 Bcf/d from 43.5 Bcf the
year before. (He records declines of 6.4% to four Bcf daily in
Louisiana, 2.5% to 4.4 Bcf in New Mexico, 14% to 3.9 Bcf in
Oklahoma, 5.5% to 15.1 Bcf in Texas and 4% to 13.6 Bcf in
federally-managed offshore territory). Consistent with the
production data, the Andrews charts also show a sharp decline in
summer injections into gas storage to 1.66 Tcf in 1999 compared to
2.08 Tcf in 1998 and a 1995-99 five-year average of 1.92 Tcf. If
the state production data stands up, Andrews expects the industry
to enter the 2000-01 heating season with a November inventory of
2.25 Tcf or 25% less gas in storage than last fall.
His figures suggest the market cannot count on Canadian gas
taking off the pressure any time soon. While production shows no
signs of declining, there is also no reason to believe the old
surplus "bubble" will return any time soon.
Andrews, echoing agencies such as the Canadian Gas Potential
Committee, points to failures to increase volumes going into the
Nova gathering grid in Alberta much beyond 12.5 Bcf/d last year
despite accelerated drilling. Firm prices are generating a shift in
Canadian field activity, but it is expected to be some time before
the new generation of higher-grade wells being drilled in the Rocky
Mountain foothills and northern frontiers of Alberta and B.C. can
make up for a natural production decline rate that currently
averages about 25% per year in much cheaper, shallower southern
In the Andrews calculations, the tightening supplies translate
into strong prices: US$2.40 per MMBtu by the end of March, up from
$1.82 in the spring of 1999, then $3.50 in November compared to
$2.65 last fall. At worst, if there are no cold snaps and
productivity comes in higher than expected, the scenario
anticipates prices of $2 this spring and $3.00 in the fall. Andrews
refuses even to guess where prices will end up, saying only that
changes will be just plain "BIG," if productivity erodes further
and the weather turns colder.
Gordon Jaremko, Calgary