Natural Gas Markets

Canada’s natural gas industry has been in a state of transition with a ­domestic oversupply of the ­commodity and historically low prices. In recent years, sweeping technological advancements have allowed producers to unlock natural gas from unconventional reservoirs, such as tight-rock and shale formations. The resulting oversupply from this unlocked abundance of the resource has caused the domestic price of natural gas to weather a 10-year low in 2012.

It is with little wonder then that producers have looked to overseas markets as customers for their product, particularly in Asia, where energy demand is projected to more than double to 65 billion cubic feet per day by 2020.

These efforts appeared to hit a snag when ­Canada’s industry minister, Christian ­Paradis, recently pushed pause on the proposed takeover of Calgary’s Progress Energy by ­Malaysia’s Petronas. The $6-billion dollar ­acquisition was aimed to transport the ­abundant natural ­resource to Asia. In a nation where ­producers have ­limited their gas production in light of a ­saturated ­supply, this decision has ­impacted share values as well as other oil and gas ­corporations, such as Nexen and Celtic ­Exploration, who both have pending deals on the bargaining table.

As the industry waits to see if Petronas can ­satisfy the government’s net benefit test to cinch the deal, there is a layer of optimism that may reveal hope for the future outlook of the North American natural gas markets. Asian ­investors have already entered into joint venture ­partnerships with Canadian natural gas ­producers. In February 2012, for example, Japan’s Mitsubishi Corporation invested C$2.9 billion for a 4% stake in natural gas assets owned by Encana in the Cutbank Ridge resource play in northeastern British Columbia. As well, a number of liquefied natural gas (LNG) export terminals are planned for Canada’s West Coast, which would provide a geographically proximate solution for the energy-hungry Asian market.

Foreign Markets:

According to Encana, one of Canada’s ­largest producers, with 3% of Canada’s ­energy needs being met by natural gas, Canada still has well over a century’s worth of supply based on current ­consumption. This is one major ­reason why producers are so primed to embrace ­foreign markets.

Dr. Sam Shaw, Encana’s VP of Natural Gas ­Economy Policy ­Development, in a recent ­interview with The OGM, states foreign ­markets ­“create exciting opportunities for our product on a global stage … [and] ­allow the U.S. ­marketplace an opportunity to wean itself off foreign oil, of which 7% is dedicated to transportation.” Shaw adds that compressed natural gas (CNG) and LNG are less emissions-intensive and offer more affordable ­alternative fuels for the transportation sector, versus ­gasoline or diesel.

“For Canada, natural gas is a game-changer. Having this massive ­supply creates a paradigm shift for Canada, which is always looking at our neighbors to the south … now we can look to global markets,” adds Shaw.

With a significant new supply coming online in the U.S. from its own unconventional shale plays, this traditional market has shrunk for ­Canadian natural gas, and, consequently, ­created a new supply and demand dynamic that has led to sustained low domestic natural gas prices. As the Canadian natural gas industry looks to diversify its markets, Asia has become a natural suitor.

Domestic Markets:

At the same time, Encana has undertaken ­advocacy efforts, aimed at increasing the ­domestic usage of natural gas. This includes the opening of natural gas fueling stations, including southern Alberta’s first public-use CNG station in Strathmore.

In addition, electricity has been one of the ­fastest growing demand sectors for North American natural gas for more than a decade. This power generation growth has seen natural gas gain share on coal for many years due to its much cleaner qualities. In the industrial sector, a dramatic reversal has been seen in the longstanding decline of natural gas demand to fuel new growth in steel, petrochemical, oil sands, and agriculture. The affordability of domestic natural gas is now seen as a critical competitive advantage for North American manufacturing.

Despite the contrast to Europe and Asia, where domestic natural gas usage is higher, Shaw asserts that Canadians are doing a fine job of aligning themselves with cleaner and more ­sustainable solutions. As Canada works to ­advance these efforts, respiratory issues in large urban areas will improve, while ­natural ­gas-powered industrial vehicles, such as ­garbage trucks and school buses, will ­continue to save their companies 40% on transportation costs and place funding back into classrooms where it serves society better.

Trading:

Despite historically low prices, Encana has maintained a “cautious optimism” on prices moving into 2013. Where trading gas on a daily basis is concerned, Dave Thorn, Encana’s VP of Canadian Marketing, affirms the following: “As a producer, we strive to ensure that all volumes produced have a market, and that pricing covers the marginal cost of production. Unfortunately, during 2012, prices reached the point where we were economically incented to shut in gas volumes as opposed to selling our gas at less than cost.”

Many producers shut in natural gas volumes in 2012 due to historically low prices. Yet the commodity has staged a modest recovery, with the New York Mercantile Exchange (NYMEX) recently nudging above $3.50 per million British thermal units (MMBtu). During its third-quarter earnings announcement, Encana announced that it had begun bringing shut-in or curtailed volumes back online.

“As for the current economy and optimism of ­natural gas prices, the economic ­situation is supportive of natural gas prices in the ­future,” says Thorn. “As natural gas is ­abundant and price competitive, various sectors of the ­economy are choosing natural gas as the fuel of choice, both from a pricing and an ­environmental perspective. This is good for the economy from a cost competiveness ­perspective, and is good for natural gas, as increasing demand will eventually support natural gas prices at more sustainable levels.”