Canadian natural gas producers exporting to the U.S. market see a faint glimmer of light at the end of a long, dark tunnel.
Prices hit a 14 year low at the end of 1991 as a persistent glut sparked fierce competition among producers for spot market sales. Crude oil drilling activity topped gas drilling in 1991 for the first time in several years as explorers pulled back in the face of weak prices.
The industry's problems have been compounded by a long-running and still unresolved dispute with state regulators over pricing and pipeline access for the California gas market.
Despite these negatives, a number of recent industry studies now paint a moderately optimistic scenario of increasing demand and a halt to the steady decline in prices between now and 1995.
The Calgary-based Canadian Energy Research Institute (CERI) released a study this spring indicating the gas surplus in western Canada is steadily dissipating.
CERI, funded by industry and the federal, Alberta, Saskatchewan, Ontario, British Columbia, and Northwest Territories governments, based its findings on a confidential survey of plans by 29 major producers responsible for 76% of Canadian production.
The study said there will be continuing fluctuations in gas prices with a firming trend through 1995 as deliverability or excess productive capacity declines.
Peter Linder, CERI gas director, says rising export sales and pipeline expansions will reduce the excess of deliverability relative to demand from a massive 875 bcf in 1990 to 640 bcf in 1993 and 452 bcf by 1995. He says demand will allow major producers to operate at 88% of capacity by then, compared with 75% in 1940.
The survey shows that major producers plan limited spending between now and 1995 on gas exploration and development. But after 1995, Linder says, increased drilling will have raised productive capacity to the point where it again exerts downward pressure on prices.
CAPACITY INCREASES
Linder reports the capacity of the producers surveyed will increase from 2.6 tcf in 1990 to 3.1 tcf by 1995. At least 80% of the 500 bcf addition will go to U.S. markets, particularly in the Northeast.
He says there will be a major jump in exports this year to the U.S. Northeast, to the Midwest in 1993 as the Northern Border pipeline system expands, and to California in 1994 when pipeline expansions go on line. He expects export volumes to rise from about 1.6 tcf in 1991 to 2.2 tcf by 1995. He says exports will sell at a higher average price than domestic sales.
"In my conclusions, although I still show a surplus of about 12% in deliverability, there in effect is no surplus because my number is on an annual average basis,' Linder says.
"You always have some surplus in summer months, and you need some surplus for operational reasons. So the 1995 surplus is effectively full capacity, and as we approach that situation prices should be firming. Buyers will be seeking longer term contracts, and they will be willing to pay a premium over spot prices. I expect prices to start firming quite a bit by the fall of 1993."
The CERI researcher says substantial new gas discoveries in northeastern British Columbia are not likely to have an immediate impact on supply.
BP Canada Inc., one of the most active explorers, has tested gas at high rates in eight wells drilled since 1989 in the Monkman area, southwest of Fort St. John, B.C., and recently was preparing to test a ninth. BP estimates its share of new reserves could be 2 tcf of sales gas.
Linder says new reserves are likely to sit in the ground until 1994-95 because it costs much more to develop fields and connect gas than to drill initial wells.
He says the bottom of the U.S. market for Canadian producers was reached in January, when spot prices fell to $1/Mcf in mid-winter, and they are now increasing.
BENEFICIAL DEVELOPMENTS
He sees a number of U.S. developments likely to be beneficial for Canadian gas sales. The U.S. economy is beginning to recover from recession. U.S. gas demand increased by 3% in 1991 and will grow by about 1.5% this year.
Drilling activity in the U.S. is at an all-time low. In 1991, only 70% of gas production was replaced. And environmental forces will enhance market preference for gas.
"All of these factors would lead one to conclude that prices will be rising, and the worst is over for the Canadian industry," Linder says.
He stresses, however, that there is still enormous gas reserves potential in North America and the world, which will tend to limit wellhead prices to perhaps $2-2.50/Mcf.
Companies responding to the CERI survey forecast an average annual plant gate price of $1.69/Mcf in 1995. The 1990 average was $1.64/Mcf.
"As prices rise to the $1.70-1.80 wellhead level by 1995, increased drilling activity and more discoveries will widen the deliverability wedge once again," Linder says.
He believes a current dispute between Canadian producers and California regulators is a short-term aberration that will be resolved.
The California Public Utilities Commission has ordered that the Alberta-California pipeline operated by Pacific Gas Transmission Co. be opened to all shippers next October.
A supply pool of Alberta producers says that would violate existing contracts, which give them 75% of pipeline capacity to ship gas under long-term contract and above spot prices. Negotiations are under way to resolve the dispute.
Linder says the CPUC is trying to speed the natural process of deregulation by opening the pipeline. He says that will happen in any case with pipeline expansion projects.
"In a couple of years at most, this California dispute will be a nonissue. There will be some concessions on both sides. I think Alberta recognizes the pressure for deregulation and market prices, but they want it phased in," Linder says.
MORE EXPORTS
Ziff Energy Group, Calgary, also forecasts improvement for Canadian gas producers in a study released in April. It forecasts an increase in gas exports from 1.6 tcf in 1991 to 1.8-1.9 tcf this year.
The Ziff study estimated U.S. producers replaced 71% of gas produced in 1991, comparable to a reserve replacement estimate of 68% by Goldman, Sachs & Co., New York.
Ziff Pres. Paul Ziff said the average U.S. gas price for 1992 may be slightly lower than in 1991, but there will be price gains within 12 months.
"The bottom of the price trough is here, or very near," Ziff said.
Low prices in the U.S. have produced the low replacement rate and dramatically constrained cash flow. Ziff says drilling activity and well completions are substantially below normal, and as supply declines prices will stabilize and start to rise in about a year.
The Ziff study notes the 1991 shortfall between gas production and reserves replacement is the first since 1987.
Dale Lucas, until recently chairman of the Alberta Petroleum Marketing Commission, also forecasts increasing demand and firming prices for Canadian gas. Lucas is now president of J. Makowski (Canada) Ltd., a gas buyer and importer for a group of local 'gas distributors in the U.S. Northeast.
'Prices are at or near the bottom. It's inevitable that demand will pick up. And, in a North American context, the amount of surplus gas available in Alberta is pretty small,' Lucas says.
"The U.S. market now amounts to about 19 tcf a year. If you get a 5% growth in demand, that amounts to about 2.5 bcfd, and I don't think we have that much surplus gas. It's only a question of time before demand picks up substantially. I think it will come sooner, rather than later-before 1995."
PIPELINE EXPANSIONS
The prospect of increased export sales is providing continued impetus for pipeline expansion programs aimed at all sectors of the U.S. market.
TransCanada PipeLines Ltd., Calgary, is completing a $2.4 billion Canadian expansion program connecting with the Iroquois Gas Transmission System pipeline into the U.S. Northeast.
Gas began flowing at 25% of capacity last December. By yearend it will move 641 MMcfd of gas from western Canada into the Iroquois line to New York, New Jersey, Connecticut, Massachusetts, Rhode Island, and New Hampshire. Iroquois says it plans an additional 250 MMcfd boost in capacity by 1995.
TransCanada, which has a 29% interest in Iroquois, requested approval for an additional $390 million expansion earlier this year to add 150 MMcfd to system capacity. And it has filed another application with Canada's National Energy Board for a $500 million looping program to add 227 MMcfd to capacity. If approved, the bulk of the work would be done in 1993 and completed in 1994.
The expansions are planned to me-et increasing domestic and export demand, including growing requirements for cogeneration projects. The TransCanada system moved 1.6 tcf of gas in 1991, up 10% from 1990.
Northern Border Pipeline Co., which links Western Canada gas to the U.S. Midwest via the Foothills Pipe Lines Ltd. pipeline system, has also received regulatory approval for a system expansion.
Northern Border says its delivery capacity will increase 22% to 1.7 bcfd when a $158 million (U.S.) expansion project is completed in November. Deliveries will be supplied by a pool of more than 300 Canadian producers.
CALIFORNIA COMPETITION
Canadian producers are looking to their traditional California market, which already buys about $1 billion in gas annually, for significant market growth.
Two groups are competing to build additional pipeline capacity from Alberta to California.
Pacific Gas Transmission Co., a unit of Pacific Gas & Electric, has begun work on an expansion of its system.
The Altamont Gas Transmission consortium, headed by Tenneco Inc., plans a line from Alberta to connect with the Kern River Gas Transmission system at Opal, Wyo.
PGT began laying pipe in California and trenching and welding in Washington this spring. The company says it has committed more than $460 million (U.S.) of the $1.6 billion it will cost for a 75% expansion of its 1 bcfd capacity line.
PGT says more Canadian gas will be needed in California for the 1993-94 heating season.
Altamont plans to begin construction of its $573 million pipeline system in 1993. Both groups plan to have their fines in service by the end of 1993 and have made financial commitments to suppliers. Most industry observers believe the market will support only one of the projects.
The Alberta government, which would issue gas removal permits for export, has said it will let the market decide. Completion of both projects would add about 1.3 bcfd of export capacity for the California market.
Nova Corp., Calgary, which operates Alberta's intraprovincial pipeline connections to export points, has collected $65 million in combined deposits from PGT and Altamont.
The payments cover costs for advance orders for pipe and equipment Nova needs to expand its system to meet export requirements. Nova says if both California projects go ahead it will have to spend $800 million for expansion.
The company had set May 1 as a deadline for an additional $190 million in payment from the pipeline promoters but recently extended that deadline to September.
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