Canadian Gas Producers Nervous About Winter Prices
By Ian McKinnon
Sunday October 13 10:31 AM EST
CALGARY, Alberta (Reuters) - Bulging storage inventories, El Nino and an anemic U.S. economy have Canadian energy producers fearing a drop in prices as the winter heating season approaches, despite strong long-term fundamentals.
November -- the gas industry's official start of winter -- sets the tone for U.S. prices through March, a factor looming large for producers now setting drilling budgets for 2003.
U.S. markets are crucial to profits for Canadian energy firms, which export more than half their production to the world's largest consumer of natural gas.
But weather is the biggest wild card for prices.
"In the last two years, November and December have been pivotal in the business," said Wilf Gobert, research director at brokerage Peters and Co.
"Two years ago, November and December were extremely cold, and last year was extremely mild. In the extremely cold winter, that was the year we had tremendously high gas prices. Last year, of course, we had gas prices going down, down and down."
The 2001-02 winter was one of the warmest on record, and the balmy temperatures and economic slowdown in the wake of Sept. 11, 2001, cut demand and prices.
A return to normal chilly northern weather could push U.S. wellhead prices to $3.34 per thousand cubic feet this winter, up 90 cents from last year, according to a recent U.S. Department of Energy report.
If the prediction holds, it will mean billions of dollars in extra revenues for Canadian gas producers, which export almost 10 billion cubic feet a day to U.S. customers. Canada is the main supplier to the United States, accounting for about 16 percent of the country's annual demand of 22.2 trillion cubic feet.
The effects of El Nino, a warming of the Pacific Ocean off South America, which disrupts global weather patterns, could mean another warm winter for North America, said John Richels, president of the Canadian unit of Devon Energy Corp. (AMEX:DVN - news).
The warm El Nino forecast, the weak U.S economy and high gas storage levels are bearish factors that may maul gas prices this winter, Richels said. Gas inventories in the United States could hit a record of 3.26 trillion cubic feet by the end of this month.
"There does seem to be a bit of a psychology that says if we haven't had cold weather by Christmas, then it's not a cold winter even if afterward it gets colder," he said.
But Devon, one of Canada's largest gas players with daily production of around 925 million cubic feet, remains bullish about the future of gas, Richels said, as do other producers.
A price slump early this year has slashed drilling in North America, meaning discoveries are not replacing declining output in aging fields. Some analysts estimate North American supply will drop by up to 3.5 billion cubic feet a day this year.
The decline plus anticipated economic recovery next year help explain why Bonavista Petroleum Corp. (Toronto:BNP.TO - news) plans to spend about half its estimated C$275 million ($173 million) 2003 capital budget on natural gas projects.
Chief executive Keith MacPhail said NYMEX futures contracts for 2003, around $4 per thousand cubic feet, indicate strong prices next year even if they languish in the winter.
"If we see C$2, then we're going to be changing our focus a little bit for the short term only," he said, citing Alberta spot prices. "I think longer term we're very hopeful that gas will be C$4-plus, and at that level we're going to make a lot of money."
($1=$1.59 Canadian) |
