Higher prices jolt natural gas industry

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A combination of frigid weather and an improving economy has lit a fire under natural gas prices in Canada and the United States this winter, prompting some forecasters to predict the industry has begun a long-term ascent from the doldrums.

In Alberta, month-ahead prices have recently hovered above $5 a gigajoule, but on the coldest days deals on the spot market spiked above $35 a gigajoule as demand for heating soared in major markets such as the U.S. Midwest and Southern Ontario and production was hampered by gas-well equipment freezing.

At the start of this year, Martin King, analyst at FirstEnergy Capital Corp, forecast Canadian natural gas to average $3.72 a gigajoule in 2014, but following the recent spikes he's rethinking his outlook, saying it could be more than 20 per cent higher at $4.50. He has projected an average of $4.43 in 2015.

The forecasts compare with averages of $2.28 a gigajoule in 2012 and $3.02 in 2013.

The cold weather has been a main driver of the natural gas price surge as inventories built up for the winter are depleted. But longer-term demand for the fuel, from industrial buyers and also a nascent liquefied natural gas (LNG) export industry, is also expected to keep growing. The result could be a renaissance for a sector that has undergone massive technological change with the evolution of horizontal drilling and multistage hydraulic fracturing, or fracking.

"This winter has laid bare what has clearly become a slowly tightening structural balance in the marketplace. It's both the demand aspect and the supply aspect," Mr. King said.

Several factors combined to pressure the market in the second half of the past decade. For one, the financial crisis in 2008 and 2009 led to a big drop in industrial demand for gas, as factories slowed down along with production of byproducts used to make plastics. The U.S. economy was slow to recover.

The fragile economy was accompanied by the wholesale adoption of fracking, the controversial technology that allowed energy companies to tap huge shale gas reserves, such as the Marcellus formation in the northeastern United States and the Haynesville in Louisiana and Texas, located close to large metropolitan areas.

Meanwhile, a string of warm winters kept heating demand in check, and storage facilities in both Canada and the United States filled up quickly during the injection season that starts each April, leading to a glut of supplies and low prices.

To deal with the slump, energy companies, such as Encana Corp., Talisman Energy Inc. and Canadian Natural Resources Ltd., cut their spending on dry gas operations and redeployed fracking technology to prospects with more lucrative liquids-rich natural gas reserves and oil.

Now, a big question is whether the industry will quickly respond to higher prices by putting more rigs into the field. That's a likelihood that could knock prices back down, according to Macquarie Capital Markets Ltd. In a report this month, Macquarie analysts predicted gas supplies could quickly recover with prices above the equivalent of $4.75 a gigajoule, as higher-operating-cost shale plays such as the Haynesville become more profitable, and companies increase spending in regions such as the Marcellus and a major British Columbia formation known as the Montney.

However, Encana, Canada's largest gas-producing company and one of the major players in the Haynesville, has no plans to pump a lot of money into that project despite the recent price runup, chief executive officer Doug Suttles said last week. He said the company is sticking to its plans to pursue liquids-rich prospects.

For now, all eyes are on North American inventories, which are injected into underground facilities in the spring, summer and fall to prevent shortages during the winter. There have been a number of record weekly storage withdrawals in the United States this season as the so-called polar vortex has descended on major population centres such as New York and Chicago and even cities that do not normally get winter blasts, such as Atlanta.

U.S. storage volumes could be at a decade low by the time the injection season begins on April 1, Mr. King said. Eastern Canadian inventories will likely be at 15-year lows by then and Western Canadian stockpiles at three- or four-year lows, he said.

"It's a big improvement over what we've seen over the past couple of years, when it was ridiculously high at the start and the end of the winter," he said.

Indeed, the drawdown does not point to an impending gas shortage, said Bill Gwozd, senior vice-president at Ziff Energy, which provides consulting services to the gas industry. Even if the working gas in storage – the volume that is reported each week by U.S. and Canadian agencies – is depleted, there is still a base supply that is even higher than the working gas capacity.

Mr. Gwozd said he expects the industry will be able to respond quickly to refill depleted inventories next summer by turning on wells that have been shut off to cope with low prices.

"In theory it shouldn't be a problem. Even if they brought all their parked wells on, they can poke holes in the ground in the basins quickly nowadays with horizontal wells, bring on incremental deliverability and achieve those goals, usually within the same season," he said.

Beyond this year, signs point to rising demand for gas. First, the industry has been focused on LNG exports as a way to bring higher international prices for a commodity that has long been subject to domestic markets.

The first plant, in the U.S. Gulf Coast, run by Cheniere Energy Inc., is slated to export one billion cubic feet of gas a day with first volumes starting by the end of 2015 or early 2016. Following that, numerous other LNG facilities are on the drawing board. About a dozen of them are proposed for Canada's West Coast, though not all are expected to proceed. Mr. King also points to increasing U.S. exports to Mexico via pipeline.

Add to that an increasing demand to fuel U.S. power generation and industrial needs with the improving economy, and the industry appears set for further gains and a need to ramp up drilling to meet both domestic and international needs.

New uses for natural gas

The natural gas industry is studying new uses for the fuel as a way to help end a years-long glut brought about partly by the rapid development of shale-gas formations. Here are a few alternatives:

LNG

Domestic and international energy companies have proposed billions of dollars' worth of liquefied natural gas plants, through which gas is super-cooled so it can be loaded onto ships and exported to markets that offer prices higher than those in Canada and the United States. There are more than 12 such plants proposed for the British Columbia coast, though developers have been slow to sanction construction amid concerns about contract pricing and unclear plans for a new tax and regulatory regime in B.C. The Christy Clark government this month delayed implementing a new system until next autumn. It is unlikely that any facilities would be built until late this decade.

Transport

The industry has made inroads into fuelling the transportation sector, though so far the focus has been on large vehicles and commercial fleets rather than passenger cars. Developers have manufactured engines that use either compressed natural gas or LNG. A major benefit is carbon emissions that are 15 to 25 per cent lower than diesel and gasoline engines. A limiting factor is scarce infrastructure for refuelling. Railways are also experimenting with natural gas-fuelled locomotives.

Buildings

The industry is eyeing increased use in residential and commercial buildings, in conjunction with renewable sources, such as solar and geothermal, as a way to boost energy efficiency for heating and cooling. Using new technology, the fuel may also be used along with other types of energy to fuel on-site electricity production.

Sources: The Globe and Mail, Canadian Gas Association