Natural gas prices in Western Canada are so low that a partner in the country's first LNG export project is closing wells that lose money and reducing its exploration program.
Malaysia-owned Petronas, which holds a 25 percent stake in LNG Canada's $ 40 billion project, has been cutting output from 50 to 200 million cubic feet a day in wells in the northeast of the country. capable of producing 700 million cf / d, says the CEO of its branch in Canada.
The practice is being adopted by a growing number of Western Canadian producers to avoid selling their natural gas at prices that do not always cover the cost of transporting pipelines.
"We talk a lot about oil infrastructure," said Mark Fitzgerald, CEO of Petronas Energy Canada Ltd., in an interview, referring to oil price rebates in western Canada attributed to pipelines.
"Gas is also stuck and if you compare the prices that Canadian gas producers are getting against our US counterparts, the spreads are significant and cost us a significant amount of money."
Only running 1 device
The company invested heavily in natural gas exploration in northeastern Canada. from 2012 to 2016, employing more than 25 drilling rigs at peak times to prove the resource potential as part of its long-term plan for the construction of a liquefied natural gas export terminal.
He's only running one rig now, Fitzgerald said.
Petronas withdrew its $ 36 billion Pacific NorthWest LNG project in 2017, but joined the LNG Canada partnership led by Royal Dutch Shell last May.
The partners agreed to continue with the project this fall, but it is not expected to be ready to start cooling the natural gas and shipping it by the end of 2023 or early 2024.
Ian Archer, associate director of IHS Markit, said the western Canadian gas industry was stable from 2000 to 2008, with output of about 16 billion cf / price of about 10 dollars per gigajoule, but that changed when they emerged new technologies for drilling and completion of wells This allowed the US to dramatically increase the production of shale gas.
Cheaper American gas began to replace western Canadian gas in markets like California, Eastern Canada and New York, and the price in western Canada fell by half, with output dropping to about 13 billion by 2012, he said. .
The trend worsened as new drilling technologies began to be used in northeastern California. and northwest Alberta to produce light products such as condensate, which is sought as a diluent to blend with the crude bitumen of the sands and allow it to flow into a duct.
The condensed wells typically contain high levels of natural gas and the increase in gas production to more than 16 billion cf / d has exceeded the capacity of the pipeline and reduced gas prices this year to 1.43 per gigajoule, about one third of the price in 2014 said Archer.
Meanwhile, the reference spot price of Henry Hub's benchmark in the US is forecast to average $ 3.17 per GJ in 2018 (around C $ 4.12), according to the U.S. Energy Information Administration.
Pipeline companies are spending billions of dollars to expand their gas systems in B.C. and Alberta, which will improve market access, but it is difficult to see where gas can be sent for better prices, Archer said.
Gas marketing is more important than ever
The first phase of LNG Canada is expected to require about 2 billion cf / d of gas to produce about 14 million tons per year of LNG, but it is expected that most of this gas will come from the partners, so it is not a great price improvement is expected. he said.
The best hope for better prices is the stronger demand for additional LNG facilities, conversions from gas-fired power plants, and more growth in oil areas where natural gas is used to produce steam and power, Archer said.
Mike Rose, CEO of Tourmaline Oil Corp., says his Calgary company froze gas production at about 1.35 billion cf / d by the end of 2017 due to low prices and shifted its focus to growing oil production .
Gas marketing is more important than ever, he said, as Tourmaline tries to move more gas to any center that offers better prices than Alberta or B.C.
"It's the most challenging moment I've seen in the Canadian oil and gas industry by far."