Canadian natural gas exports are headed for their second straight annual decline. With results in for two-thirds of the current contract year, sales volumes are down by 2%. Border prices have eroded by 1%. Revenues are off by 3%.
Pipeline deliveries to the United States dropped to 2.18 Tcf in the period Nov. 1, 2009 through June 30 of this year from 2.231 Tcf in the same period of 2008-2009, shows the latest trade scorecard compiled by the National Energy Board.
The average price fetched by Canadian gas at the international boundary slipped to US$4.89/MMBtu during the first eight months of the 2009-2010 contract year from US$4.95 in November-June of 2008-2009. Revenues retreated to US$10.77 billion from US$11.14 billion.
From the viewpoint of Canadian producers, the financial results of gas trade with the United States look much bleaker due to a lasting change in the relationship between the two countries’ currencies.
The loonie’s value has risen to near par with the U.S. dollar, in a consistent range where US$1.00 translates into C$0.94-1.00. The result has been the loss of an exchange rate premium that previously ran as high as C30-40 cents for every US$1.00 of the export gas price.
In Canadian producers’ currency, border prices lost 16% to average C$4.75/gigajoule (GJ) during November-June of 2009-2010 compared to C$5.63/GJ in the same period of 2008-2009.
Measured in loonies, Canadian gas export revenues were down by 18% at C$11.22 billion for the first eight months of the current contract term from C$13.6 billion for the first two-thirds of the previous trading year.
The only consolation on international gas market scorecards is that the rate of decay of Canadian exports is slowing. Pipeline deliveries to the U.S. plunged by 11% in the 12 months that ended last Oct. 31. Prices dropped 49%. Revenues plunged by 54.5%.
The final tally of pipeline exports from Canada for 2008-2009 was 3.3 Tcf, down from 3.7 Tcf the previous contract year. The slippage put an end to a 20-year growth streak that multiplied Canadian sales into the U.S. nearly four-fold from a depressed base of 993 Bcf at the 1987 onset of international gas deregulation and free trade.
By abolishing government border price and volume controls the policies ushered in a gas renaissance especially in Alberta, source for more than four-fifths of Canadian supplies. With boosts from frequent pipeline additions, exports grew to nearly 60% of production in the strongest growth years. But the 2008-2009 economic recession and energy price contraction stopped the momentum cold.
The annual average price fetched by Canadian gas exports at the international border dropped to US$4.42/MMBtu in the 2008-2009 contract year from US$8.69 for 2007-2008. In 2008-2009, the one-two punch of volume and price losses cut Canadian gas export revenues by more than half to US$14.7 billion for 2008-2009 from US$32.4 billion in the previous contract year.
Even the most bullish Canadian industry analysts are starting to suspect that a lasting change is developing on the continental market. “We have shifted to a much more price-bearish stance for North American natural gas prices for the short-, medium- and long-term,” First Energy Capital Corp. said in a lengthy research note to investors.
The Calgary financial house, which makes a specialty of detailed gas forecasting, lowered its expectations for annual average prices to US$4.63/MMBtu for calendar 2010 from US$5.00, US$4.75/MMBtu for 2011 from US$5.75, US$5.00/MMBtu from US$6.25 for 2012 and US$5.25/MMBtu from US$6.50 for 2013 (see Daily GPI, Sept. 1).
For gas recovery to evolve, FirstEnergy says, “Prices must remain low enough for long enough in order to undermine the economics of key resource plays, slow drilling and negatively impact supplies. In addition, more demand needs to emerge in a lower priced environment to mark a clear shift in underlying market balances from one of expected steady surplus to one of tightness.”
But an opposing, brighter view is also making the rounds of the Canadian gas community. “This industry may be on the verge of being healthier than has seemed to be the case recently,” Navigant Consulting Inc. analyst Rick Smead said in a review of the North American natural gas market.
The current glut blamed for poor prices could be a mirage built on flawed expectations, Smead suggested. Widespread forecasts of prolonged weakness appear to understate gas consumption by power plants in the U.S. and overstate low-cost supplies, he said in research notes circulating in the Canadian gas capital of Calgary.
After reviewing U.S. power generation data, Smead said, “it would appear that we are using proportionately much more gas than we used to and that the contribution of coal is declining fairly steadily.” Even if gas only holds onto its current share of the generation market, the Navigant analyst estimated demand this year from power plants will turn out to be higher — and by a healthy 5-7 Bcf/d — than consensus forecasts including the current outlook of the U.S. Energy Information Administration.
Canadian producer Husky Energy Inc. voted with its wallet this week in favor of the brighter forecast by buying an Alberta gas asset package from Talisman Energy Inc. (see Daily GPI, Sept. 2), which is living up to its heritage as the former BP Canada by increasing emphasis on international oil projects. For an undisclosed price, estimated by financial analysts to be C$450 million (US$428 million), Husky bought 65 MMcf/d of production, proven reserves of 222 Bcf, and 190 square miles of undeveloped mineral rights in a central Alberta area where it already has a jumbo gas processing plant and field pipeline network.
In known producing areas with well developed industrial infrastructure, gas is still a ticket to growth, Husky suggested. In announcing the acquisition, Husky president Asim Ghosh said a five-year development program will increase output as part of a “strategy to accelerate near-term production opportunities and to leverage our balance sheet capability to make acquisitions.”
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