A natural gas flare on an oil well pad burns as the sun sets outside Watford City, North Dakota.Andrew Cullen/Reuters
The mass shutdown of oil sands plants due to Alberta wildfires has pulled natural gas prices to levels not seen since the 1980s, heaping more financial pressure on the energy sector.
The oil sands industry is a major user of gas to fuel operations, and shutdowns of the Fort McMurray-area plants and related facilities have slashed demand by as much as 25 per cent and prompted a drop in price to below 50 cents a gigajoule, according to FirstEnergy Capital Corp. A year ago, it sold for about $2.65 a gigajoule.
Gas markets had already been depressed following an unusually warm winter that squelched heating demand and pushed inventories to a record. Meanwhile, exports to the United States have gradually fallen as U.S. deposits such as the Marcellus have become huge supply sources for major cities. Canadian storage facilities could be essentially full by the end of the summer, the investment bank said.
The impact on the gas market adds to the crisis taking its toll on companies as well as the Alberta and national economies. Alberta Premier Rachel Notley and Suncor Energy Inc. chief executive officer Steve Williams offered some comfort on Tuesday, suggesting that restarting most of the oil production would take days rather than several weeks or months.
Since the fires forced energy companies to shut off more than one million barrels a day of oil sands-derived crude, starting early this month, 600 million to 900 million cubic feet a day of gas demand has disappeared, FirstEnergy analyst Martin King wrote in a report.
On Monday, wholesale gas at the AECO storage hub in southeastern Alberta sold for as low as low as 48 cents a gigajoule, its lowest since 1985, he said. It had regained ground to $1.41 a gigajoule on Wednesday, according to the NGX electronic exchange. That is still an unusually low price, even for the spring "shoulder season" between peak heating and cooling demand periods.
Canadian gas producers have been forced to operate on extremely thin margins in recent years, as the shale revolution unlocked massive U.S. reserves, driving down prices and shrinking previously lucrative export markets. The skid in Alberta pricing, albeit likely temporary, only exacerbates matters.
"Over the weekend, the lack of demand drove gas prices right to the bottom. And what you had was gas either going into storage or being sold very cheaply on the spot market," said Jeff Tonken, chief executive officer of Birchcliff Energy Ltd., a junior producer.
"Every penny, annualized, is $1-million of cash flow to us, so that's a lot of money," Mr. Tonken said.
Birchcliff, which operates in the Peace River Arch basin of northwest Alberta, is able to keep costs down by operating its own processing plants. That has enabled it to keep production flowing. But other companies with cash costs above revenue will probably be forced to halt production until market conditions improve, Mr. Tonken said. "There is significant financial stress going on inside the industry."
Analysts at Raymond James cautioned that the drop in gas prices driven by the oil sands outages will be limited by the time it takes to bring those plants and related facilities back on line. If the oil plants are shut for two weeks, demand will be reduced by 11 billion cubic feet. Ten weeks of demand loss would increase that to 53 billion cubic feet.
"While the latter number certainly seems big enough to worry about at the margin, it too is a small number in the context of the entire North American natural gas market where [market analysis firm] Bentek estimates current total daily demand running at about 73 billion cubic feet a day and is expected to spike to something in the order of 76-80 billion cubic feet a day as we enter the true cooling demand season," Raymond James analysts said in a research note.
Jeffrey Jones