Strength in natural gas prices is spawning innovative strategies in Canada.
Canadian Hunter Exploration Ltd., Calgary, has bought its way out of a prepaid natural gas supply contract it signed in 1991, in order to take advantage of today's higher gas prices.
Meanwhile, Pacific Northern Gas Ltd. (PNG), Vancouver, BC, has offered to reduce the transportation toll charged to Vancouver-based Methanex Corp. on natural gas feed to Methanex's Kitimat, BC, methanol plant. Poor economics had prompted Methanex to close the plant (OGJ Online, July 7, 2000, and OGJ, July 5, 1999, Newsletter).
Canadian Hunter
Canadian Hunter paid $103 million to get out of having to deliver 65 trillion btu of gas over the remaining 7 years of the contract. The company will now be able to sell 25 billion btu/day of gas at a more favorable rate, it said.
An undisclosed major independent producer is still obliged to deliver 10 billion btu/day to Canadian Hunter under terms similar to the original agreement. Canadian Hunter only has to pay for costs related to crown royalties, gathering, processing, and transportation of gas it received under the prepaid arrangement.
At the same time, Canadian Hunter plans to sell 19 billion btu/day of gas at $4.40/MMbtu on the forward market for 5 years, to capture a favorable price spread starting Nov. 1. The full cost of this gas supply obligation restructuring will be reflected in 2000 earnings and will affect cash flows and earnings the next 7 years.
Methanol plant reopening?
Methanex on Aug. 4 announced a plan for British Columbia's provincial government and PNG to share the costs and risks of Methanex's Kitimat methanol business in order to reopen the plant (OGJ Online, Aug. 4, 2000). PNG's counterproposal would reduce the transportation toll charged to Methanex by 55%. The deal is subject to BC Utilities Commission approval and contingent on Methanex agreeing to a new long-term contract with PNG. Under PNG's proposal, the toll would be reduced to the equivalent of $11 (US)/tonne of methanol produced at Kitimat, vs. total estimated methanol production costs of $170 (US)/tonne.
PNG Pres. and CEO Roy Dyce said that, under PNG's counterproposal, the toll to Methanex for transporting gas would represent only 6.5% of total methanol production costs.
PNG has no control over other production costs at Kitimat, particularly natural gas prices, said Dyce: "We have offered to substantially reduce our transportation toll, but that alone won't solve Methanex's problems. In fairness to our other customers, the communities we serve, our employees, and shareholders, we can only go so far-and only in return for long-term commitments from Methanex."
PNG will continue talks with various parties, including Methanex, the provincial government, and the Job Protection Commission to help establish conditions under which Methanex will reopen the Kitimat plant.
