Future looks good for Alberta gas
Monday, March 29, 1999
THE GLOBE AND MAIL - Canada's National Newspaper
MATHEW INGRAM
Calgary -- There doesn't seem to be much for Alberta's gas producers to cheer about at the moment. Contrary to expectations, La Nina didn't result in a colder-than-normal winter -- the kind that chills the bones, but warms a gas producer's heart. Instead, there wasn't much winter at all in most of the important North American gas markets, and that has kept prices depressed. So what possible reason could there be to get excited about gas?
One of the main reasons to get interested in natural gas companies is low oil prices. And not just because low oil prices means oil-focused companies aren't going to do as well financially -- although that's a pretty good reason, too. But there's another, more complex, reason why natural gas producers stand to benefit from low oil prices (and they are still fairly low, even though they have risen substantially in the past few months).
Most companies in the oil patch have a mixture of oil and gas operations, and in most cases the oil side subsidizes the gas production side -- in part because drilling for sizeable gas deposits tends to be more expensive than producing oil (depending on the type of oil). The result is that when oil prices are low, most companies can't afford to produce as much natural gas as they would like, because their cash flow is so constrained.
In that way, low oil prices help keep a lid on the supply of natural gas, and that in turn helps keep prices high. But only because of another key factor: strong demand. That demand is coming from the United States, where not only is natural gas use increasing, but production has fallen off by even more than it has in Canada. FirstEnergy Capital says U.S. winter drilling levels are down by 46 per cent from the same period last year, close to four-year lows.
In the past, Alberta producers had no real way to take advantage of an increase in demand, because pipeline capacity to crucial U.S. markets was more or less full. That has changed, however, thanks to the addition of the Northern Border pipeline and expansions by TransCanada PipeLines. Now, there's the opposite problem: too much pipeline space and not enough production. By the end of this year, some industry watchers estimate that there could be a production shortfall of about one billion cubic feet a day.
And even as Northern Border and TCPL's expansions get filled up, another pipe will appear on the horizon: the Alliance pipeline, the producer-financed route from northeastern British Columbia to the key Chicago market, that is expected to open for business in 2000. The Alliance consortium says it has firm commitments from producers for 1.35 billion cubic feet of gas a day to fill the pipeline -- but there is real concern about where all that gas is going to come from.
Having too much pipeline capacity will cause some discomfort for TCPL and other pipeline companies, as well as the shippers who have agreed to fill the new lines with gas, but it will also help keep the natural gas price high -- higher than it has been in a long time for Alberta producers. And it will stay that way until the excess capacity disappears, which FirstEnergy's research says isn't likely to happen for three to five years.
At the moment, mind you, Western Canada and most other markets have more gas than they know what to do with. The levels stored in Alberta and the U.S. Midwest are at near-record highs for this point in the year -- the end of the winter drilling period. Gas in storage is usually depleted through the winter and spring, and gets built back up again during the so-called fall "injection" season as producers start stockpiling for the winter.
By the time fall rolls around, natural gas prices will be climbing, since there won't be enough supply to fill the storage and all the pipelines at the same time. By the end of the year, FirstEnergy says it expects gas prices could be close to $3 per thousand cubic feet, or 20 per cent higher than they are now, and twice what they were in March, 1997.
The lure of that kind of payoff will draw even more players toward gas -- and the slump in oil last year means more than 50 per cent of drilling activity is already gas-related (compared with 30 per cent in late 1997). But Mr. Molyneaux says even if the entire oil patch could drop everything and get gas, it wouldn't be enough to erase the excess capacity.
And the fact is that the vast majority of companies can't drop everything and go after gas. For one thing, there is still a substantial cash flow crunch as a result of almost a year and a half of low oil prices. If a company starts getting its head above water on oil, the first thing it's going to do is look at paying down some of its debt before it goes spending even more money on some $3-million deep-gas wells in the Foothills.
The result, says FirstEnergy, is one of the most bullish environments for natural gas in recent memory. Anyone already focused on gas will be sitting pretty, and everyone else will be trying to find a seat as quickly as possible.
Business West readers can reach Mathew Ingram by fax at (403) 244-9809 or by E-mail at
mingram@globeandmail.ca
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