While Canada’s oil crisis has stolen much of the media spotlight in recent months, Canadian natural gas producers have been going through a similar predicament—not enough takeaway capacity amid growing production, and as a result, plunging domestic prices.
Last year, the annual average discount of Alberta natural gas benchmark AECO to the U.S. Henry Hub benchmark was at its widest in nearly two decades—since 1999, according to data crunched by Bloomberg.
While fracking has opened opportunities in the Montney and Duvernay plays in Western Canada, competition from surging U.S. natural gas production, again thanks to hydraulic fracturing, has been cutting into the Canadian market share in the United States over the past decade.
Canada’s natural gas producers and Alberta’s government realize that they need to expand market access if they want to compete for a share of the growing global natural gas market and get a fair price for their resource.
This sounds eerily familiar with the market-access crisis that Canadian oil has been going through.
“Alberta and its natural gas producers face a daunting crisis,” Alberta’s Natural Gas Advisory Panel said in a report in December.
Alberta has taken steps to address the wide natural gas price discount, although they have not been as drastic and as intervening as the province-wide oil production cut designed to ensure higher prices for Western Canada’s crude.
In December 2018, Alberta set up an LNG Investment Team “to work directly with industry on reducing barriers for securing final investment decisions on export projects that will increase the value of Alberta’s natural gas resources.” Related: U.S. And China Hold Key To Higher Oil Prices
“Whether we’re talking about oil or natural gas, the details are different but the story is the same. Albertans are getting pennies on the dollar because we can’t get our resources to international markets, and our biggest customer has become our biggest competitor,” Alberta’s Minister of Energy Margaret McCuaig-Boyd said.
The industry is working on several projects to maximize the value of Canada’s natural gas and expand market access.
TransCanada said in October that it would move forward with a US$1.1 billion (C$1.5 billion) expansion of its NOVA Gas Transmission Ltd. (NGTL) System.
“The NGTL System continues to expand as parties require and contract for greater pipeline capacity to meet the growing demand for clean-burning natural gas from domestic and export markets,” TransCanada’s president and CEO Russ Girling said.
Petrochemical company Nauticol plans to build a methanol facility, which will use natural gas, near Grande Prairie, Alberta, with commercial operation forecast for 2022. Inter Pipeline is building the Heartland Petrochemical Complex in Strathcona County, Alberta, which will process locally sourced low-cost propane into polypropylene plastic and which is scheduled for completion for late 2021. Pembina Pipeline Corporation and Kuwait’s Petrochemical Industries Company gave the go-ahead last month to an integrated propane dehydrogenation plant and polypropylene upgrading facility in Alberta’s Industrial Heartland.
All three projects are supported by Alberta’s government in the form of royalty credits as part of the province’s energy strategy to encourage companies to build manufacturing facilities that turn ethane, methane, and propane feedstocks into more valuable products such as plastics, fabrics, and fertilizers.
While local petrochemical production would help absorb some natural gas production, the bigger issue with Canadian producers is the lack of enough export access to tap international markets. Related: One Last Warning For The U.S. Shale Patch
After some 20 liquefied natural gas (LNG) plans and projects were either scrapped or deferred in recent years, last year Canada finally got its first LNG export project as the five companies behind the US$30 billion (C$40 billion) LNG Canada—Shell, Petronas, PetroChina, Mitsubishi Corporation, and KOGAS—made a final investment decision to proceed with the project.
Local Canadian gas producers are also looking to address low domestic prices with an LNG export project. Ten companies, including Seven Generations Energy, Peyto Exploration and Development, and Advantage Oil & Gas, have formed a consortium to potentially revive a scrapped project or draft a new one, offer to supply gas, and find a large company capable of funding an LNG facility construction, the Financial Post reported last month.
“Canada missed the first wave of LNG opportunity and cannot afford to miss the next one. However, Canada is not moving fast enough to capitalize on the anticipated LNG supply gap,” according to a new report by the Canadian Association of Petroleum Producers (CAPP).
“Further, while CAPP is encouraged by LNG Canada’s decision to proceed with construction of its facility near Kitimat, B.C., one plant does not constitute an LNG industry. It’s a good start, but Canada needs to facilitate the development of more such projects on the West Coast,” the association says.
By Tsvetana Paraskova for Oilprice.com
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