Envy instead of glee was the dominant mood among Canadian producers as Alberta natural gas failed to take off when international oil prices shot up into the $100-a-barrel-plus stratosphere.
“It’s like people with their noses pressed up against a window watching a party go on,” said Gary Leach, executive director of the 470-company Small Explorers and Producers Association of Canada (SEPAC).
“We’re fairly discouraged at the moment,” said Don Herring, president of the Canadian Association of Oilwell Drilling Contractors (CAODC).
“The actual impact of a big increase or drop really isn’t felt much now by the Alberta industry,” agreed Greg Stringham, vice-president of the Canadian Association of Petroleum Producers (CAPP).
Triple-digit price peaks will likely be brief as heating season tapers off and oil refineries reopen in the United States after finishing maintenance, FirstEnergy Capital Corp. predicted in a research report to wary investors in the Canadian industry.
Even while price highs last the effects are spread unevenly across an Alberta industry divided into light oil, oilsands and natural gas producers, Leach and Stringham said. The light oil faction that reaps full benefits of increases in the commodity market benchmarks is by far the smallest.
Less than half of Alberta oil production is the premium grade flowing from traditional wells that fetches full international prices. Conventional output peaked in Alberta about 30 years ago and has steadily declined for about two decades.
Alberta output is increasingly oilsands bitumen and heavy crude that costs more to tap and sells at quality discounts of 30% to 60% off the global benchmarks, pointed out the CAPP and SEPAC officials, whose groups represent virtually all Canadian production.
Oilsands developers cannot jump to take quick advantage of international prices because their megaprojects take five to 10 years to build and follow plans based on energy outlooks for four to six decades, Stringham said.
Industry realities are expected to start showing up more clearly in commodity trading sometime this year. In collaboration with producers north of the border, the New York Mercantile Exchange is working on a new futures contract for a typical Alberta grade known in the industry as Western Canadian Select or Western Canadian Blend. It is also considered more representative of a growing share of internationally traded oil from offshore sources that is likewise becoming a heavier grade of crude on average, although at a slower rate than the Alberta product slate.
As the traditional WTI benchmark hovered around $100 a barrel, the Canadian blend traded at about $60. The contrast between commodity market image and industry reality was no less dramatic from the perspective of Canadian natural gas producers. In the industry’s conventional drilling and production segment Herring emphasized “we’re still in the gas business.”
“We’re going to have a pretty bad 2008,” the CAODC president predicted. Canadian field activity and employment are projected to drop toward 1990s lean-times lows with only about half the drilling rig fleet employed.
Natural gas fuels about 70% of Alberta drilling and provincial royalties, and its prices continue to lag behind American markets as well as the oil side of the industry.
As oil burst into the headlines, spot prices for Alberta gas stagnated at about $6.90/MMBtu, advancing modestly only to give up ground in a repetition of a pattern that has prevailed since the last international market peak in the 2005-2006 heating season.
The current trading range is up to 25% below the $8-9 band that industry leaders say has to be regained to revive drilling.
Uncertainty over unresolved details of provincial gas royalty increases planned for 2009 continues to worsen the drilling slump by making investors and producers hold back from commitments, Herring said.
The Canadian dollar’s strength against its U.S. counterpart also mutes effects of price increases, the industry leaders said. The exchange trend has been a strong contributor to the weakness of Canadian gas prices, coupled with resilient high production and pipeline export volumes that have repeatedly surprised industry analysts over the past 18 months.
At currency rates that prevailed until about 18 months ago, each US$1 price rise translated into gains of C$1.20 to $1.40. The foreign exchange premium is gone — and worse, with periodic jumps by the Canadian loonie above par with the American greenback meaning that a US$1 price gain can at times be worth as little as C90 cents.
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