It’s December already so is there any festive cheer to be found on the Canadian oil patch?
AECO Station 2 gas trading above C$3.00/Mcf and the futures curve up 20% over three months
Canadian gas storage at a five year low heading into winter.
The US shows Canada how to build an LNG industry from scratch to third largest in just a few short years.
Montney plays appear four times in the top twelve of the Scotia Bank Top 100.
No turkey for Tiny Tim this year but his prospects are looking better.
T’was the night before Christmas, when all through the house not a creature was stirring, not even a mouse. It’s been another bruising year for Canadian energy companies so it’s not surprising that things are a bit quiet. To horribly mix up our Christmas literary metaphors even further perhaps the oil and gas companies are playing the role of Bob Cratchit in a dystopian version of Dickens’s Christmas Carol wondering if they are going to get a turkey for Tiny Tim this year.
The capital markets make an effective Ebenezer Scrooge gazing with dispassion from the high desk with wallets remaining firmly closed. The map showing Station 2 AECO gas price above C$3.00 last week should surely put a smile on Bob’s face. There must be hope of turkey for Tiny Tim in the future. For most of the year Station 2 AECO has been $1.50 or less so if the ghost of Christmas Future was going to tell us that these prices are going to become common place in the years to come then I’m sure it would be a well-received Christmas present for one and all.
Let’s just stop and consider that. Do we have to jump up on the Fat Man’s knee and promise to be good to get our present or can we carry on being naughty because all this is going to happen anyway?
In the short-term gas storage inventories are way down on previous years (Figure One). If there is a cold winter, then these prices might seem very cheap. AECO gas for 2020 is now trading 20% higher than it was three months ago. This is a seasonal variation and while a very welcome “sign of life” for producers, Calima shareholders need to see longer term and more sustained upwards price movement.
The Calima Lands are rich in condensate which trades prices close to WTI but we would expect about 60-70% of our production, in terms of energy equivalent, to be gas so we need to have some confidence in long term gas prices.
Canada ranks 4th in the world in terms of gas production and is the 5th largest exporter. Despite this Canada has no way to export its gas anywhere other than the US and as that market becomes a net exporter rather than an importer where does Canada go? How is the ghost of Christmas Future going to get us the maps we want in years to come?
The US has made the switch from gas importer to exporter very quickly. In just a few short years the US has become the third largest global LNG supplier with its freezers consuming 7 Bcf/d and there are many more terminals on the way. By 2024 US LNG freezers will be consuming 12 Bcf/d. In Canada there has been talk about LNG for more than 20 years. Indeed, there has been so much talk and so little action that most folks have stopped believing and we all know that the Fat Man doesn’t come down the chimney if you stop believing.
If you have read one of these newsletters before you don’t need to be reminded that LNG terminals in western Canada are going to be the cleanest in the world in terms of CO2 footprint. They will also be cost competitive against both the US and Australia.
Canada’s glacially slow progress in developing an LNG gas export market while their US cousins run circles around them is painful to watch but at the end of the day anything that shifts gas molecules off the North American continent is a good thing for both US and Canadian producers. The Canadian LNG industry is finally on its way so now is not the time to stop believing. Just the first three projects on the west cost of British Columbia could consume more than 6 Bcf/d so the ghost of Christmas Future has a twinkle in his eye because there is light at the end of the tunnel for gas prices. For that we should all be truly grateful.
To wrap it all up here is a little stocking filler. Scotia Bank have just published the 10th edition of their playbook ranking the top 100 of North America’s oil and gas plays. We were encouraged to see that they calculate activity weighted average Montney well returns now exceed those from the Permian Basin. While the Canadian sector is still being hammered by pipeline egress issues and low natural gas prices, they see positive developments on the horizon and conclude that “several players with exposure to the Montney provide compelling investment opportunities”. The Montney appears four times in their top twelve ranked North American plays.
Unfortunately, there is no happy end to our Christmas tale this year. It doesn’t look like Tiny Tim is getting a turkey this Christmas but there is at least a nice smell coming from the kitchen. Ebenezer Scrooge is going to pick up the scent of profit from deep value at some point and ease the purse strings. Canada will then be able to seize the opportunity for clean sustainable energy that is right under the ground they stand on.
To answer our earlier question about the Fat Man’s knee. Yes, we do have to jump on up there and promise to be good. Capital discipline, efficiency, free cash flow and returns to shareholders. Cheap energy is here to stay so we all must compete.
Best wishes for the festive season and a healthy and prosperous New Year to you and yours.
