Natural gas prices in Canada could fall below $1, report warns
COMMENT: Back in 2000, after years of natural gas prices trundling along around $2 per thousand cubic feet (mcf), BC Hydro introduced its plan to build a gas pipeline to Vancouver Island and build gas-fired generation plants on the island. Then the California energy crisis happened (brought on by greed unleashed by deregulation in wholesale markets there), and gas shot up as high as $10 mcf.
We mocked when BC Hydro's expert gas economist said that he expected the long term price of gas to level out around $3. As North America careened into diminishing supplies, and high prices drew dozens of proposals for LNG import terminals, we cheered.
High and volatile gas prices were a big factor in the eventual decision by BC Hydro's board to kill the pipeline and the gas plants and BC Hydro's entire natural gas strategy.
And now, with global economies in the dumpster, gas demand off, and North American supplies ramping up from huge shale gas plays, I'd be surprised if that economist isn't having a laugh of his own.
Quote to note: "You need to stop incenting producers to drill." That's the last sentence on this page. Yet the BC government is "incenting" the blazes out of the gas industry in northeast BC. (Earlier comments on this subject here and here.)
Fact check: This article says the AECO price has fallen below $2, but the NGX site says the last AECO spot trade was at $2.26. Henry Hub prices are around $3.28, according to Stockwatch.)
By John Morrissy
Financial Post
August 25, 2009
 The U.S. natural gas market may be set to turn the corner, says Reuters columnist John Kemp. (Photograph by: Herald Archive, Canwest News) Service |
Natural gas in Canada, already scraping along at prices below $2, a low not seen since 2002, may fall below $1 in the coming weeks, according to a report from FirstEnergy Capital.
"The market is trying to rationalize all of the gas that is piling up and there are fewer and fewer places to put it. We expect that a $1 handle on prices will start becoming more common in the next few weeks," said analyst Martin King.
The Calgary-based energy advisory said that although Canadian natural gas supplies "continue to drift lower," there is yet no evidence of large-scale shut-ins taking place.
In fact, inventory levels in Western Canada, at 492.46 billion cubic feet as of Aug. 23, now exceed the 489 billion cubic feet of existing storage capacity, prompting King to suggest that some dormant storage sites have been reactivated.
"At this stage, we still believe that shut-ins on the scale of 0.5 (billion) to 0.8 billion cubic feet per day may be needed for a short period of time for some kind of balance to be achieved in this market," the energy advisory's report said.
"If this does not occur, then protracted extreme price weakness is likely in store for the middle to late part of September to prices below $1 per gigajoule," the report said. A gigajoule is a standard measure equal to the amount of energy consumed by a 100-watt light bulb in approximately four months.
Average prices at the AECO natural gas hub in Alberta dipped below $2 Cdn to about $1.90 Cdn this past weekend, FirstEnergy said.
Prices have been on a downward spiral since the middle of 2008, driven lower by the economic downturn as well as surging supplies from liquefied natural gas producers, and new "resource-play" gas fields that have come on stream in recent years.
© Copyright (c) The Vancouver Sun
Natural gas prices can't find a bottom
David ParkinsonGlobe and Mail
Thursday, Aug. 20, 2009
The slip-sliding natural gas market plumbed new seven-year depths Tuesday, and industry watchers warned that overflowing storage facilities and tepid demand could push prices still lower.
The New York Mercantile Exchange's benchmark U.S. natural gas contract, for September delivery, closed at $3.10 (U.S.) per million British thermal units, down 6 cents on the day and their lowest settlement price since August, 2002. It marked the ninth consecutive decline for Nymex gas futures, during which the September contract has tumbled nearly a dollar.
September prices at Alberta's AECO natural gas hub fell 13 cents (Canadian) to $2.54 a gigajoule, down nearly 25 per cent in the past two weeks.
Slumping demand for natural gas due to the economic downturn has been compounded by swelling supplies, from new large-scale shale gas fields that have come on stream in the United States, and by unusually cool summer weather that has tempered the usual strong summer gas-fired electrical demand for air conditioning. The combination has left natural gas storage facilities in both Canada and the U.S. bursting at the seams, and the overflow is landing in the spot market, depressing short-term prices.
“Short term, there's just too much gas and there's nowhere to put it,” said Henry Cohen, president and chief executive officer of energy-focused money management firm Full Cycle Energy Investment Management Ltd.
Although temperatures in many major North American markets have heated up in the past week, market watchers said it has come too late to make much difference. Traders realize that there won't be enough hot days to make a dent in the serious oversupply.
Analysts said that as summer winds up and the market moves into the slower-demand autumn season, prices could slide further – perhaps as low as $2 (U.S.) per million BTU. Even the hurricane season is unlikely to change that, as short of catastrophic-level storms, any production disruptions could be easily made up by ample supplies from other regions, analysts said.
“ Short term, there's just too much gas and there's nowhere to put it”
Prices have fallen to uneconomic levels for producers in both Canada and the U.S., yet production has been stubborn to pull back, and has actually been rising in many U.S. producing regions. Mr. Cohen noted that American producers were encouraged to continue drilling in shale deposits in order to avoid losing property leases, which led to significant new production coming on stream even as prices fell.
Tight credit conditions have caused many producers to maintain output despite unprofitable prices, because they need to generate cash flow to cover their financial needs.
Analysts noted that still-strong prices for longer-term natural gas futures are also encouraging producers to maintain their output levels; the futures curve continues to signal prices north of $5 by the end of this year, and nearly $6 by next fall.
Analysts said that if prices dip toward $2 in the short term, it could convince many producers to shut in some production – especially in Canada, where break-even costs for many natural gas fields are in the $7 range, compared with less than $5 for most U.S. producers. Already, some big producers have been scaling back their output, including Canadian giant EnCana Corp.
But as long as forward-curve price expectations remain high, those supply issues may well persist, said Randy Ollenberger, energy analyst at BMO Nesbitt Burns in Calgary.
“The [forward] strip is still reasonably high,” he said. “I think you need to see the whole curve move lower. You need to stop incenting producers to drill.”