CALGARY — Stronger and more stable natural gas prices in the wake of North American oil production cuts are offering hope for better times to some gas producers but haven't changed Keyera Corp.'s plans to "optimize" its gathering and processing assets.
The Calgary-based company is moving ahead with a plan to close and dismantle four central Alberta gas processing plants with more than 600 million cubic feet per day of capacity over the next two years, a move that will affect 76 employees.
Last fall, Keyera announced the closing of two other plants in the same area, removing processing capacity of 220 million cf/d, and illustrating the point that the sector's price-related woes are far from over.
"It's really because of a lack of activity," said CEO David Smith in an interview. "We still believe there are decades of economically attractive natural gas and liquids-rich natural gas to be developed.
"But the commodity prices over the past five or six years have not supported the level of drilling activity to keep the volumes flat, so the volumes have declined to the point where we can't justify keeping those plants open."
Global oil prices have crashed as measures taken to fight the COVID-19 pandemic result in supply greatly exceeding demand. A recent deal to limit production by OPEC and other producers is considered inadequate to change the trend.
In response, producers are cutting their exploration budgets and curtailing oil production throughout North America. Oil wells always produce a certain amount of associated natural gas as a byproduct so less oil means less gas.
"There's always associated gas with oil. We've had $7.2 billion of capex (capital spending) reductions in Canada and $18 billion of capex reductions in the U.S.," said Jeff Tonken, CEO of Birchcliff Energy Ltd., in a recent interview.
"Gas looks strong because there's going to be less oil around. And that makes it really good for natural gas producers such as ourselves."
The average spot price for gas in Alberta so far this year is $2.03 per thousand cubic feet (mcf).
Tonken said producers have recently been able to lock in sales contracts above $2 per mcf for the rest of 2020, a level at which Birchcliff's gas production from its Montney wells in northeastern B.C. and western Alberta is profitable.
Canadian natural gas production hit a 20-year low in 2013 of about 14 billion cubic feet per day. Its rebound to just over 16 billion cf/d last year, driven mainly by associated gas from wells drilled primarily for oil or other petroleum liquids, was simply a return to levels last seen in 2008, well short of the peak of 17.3 billion cf/d in 2002.
Prices, meanwhile, have peaked and crashed in the past decade, varying from C$11.38 per gigajoule (a unit of energy roughly equal to a thousand cubic feet of gas volume) in October 2015 to C$5.20 in February 2014 and just 55 cents in June of 2019.
Alberta prices for natural gas are also being supported by a new program that makes it easier for producers near the northern B.C.-Alberta border to move gas into storage during periods of maintenance on TC Energy Corp.'s gathering pipeline system, pointed out analyst Robert Fitzmartyn with Stifel FirstEnergy.
At times in the past few years, prices for natural gas trapped by outages in the pipeline system have dropped to negative values, he said.
"If Alberta is on its way to shutting in more than one million barrels per day of oil, there will be some reduction there (in natural gas)," said Fitzmartyn.
"But there's going to be demand destruction as well."
It's unclear, for instance, whether demand for gas-generated electricity will fall if empty office buildings aren't being air conditioned this spring. Industrial demand could be lower than usual. And shutdowns in the oilsands will reduce the need for gas to create steam for thermal recovery projects, he said.
Low-cost producers and those with exposure to the best resources, such as the Montney, can generate profits with today's prices but neither Tonken nor Fitzmartyn expect any increase in overall gas volumes in Canada.
"To drill conventional natural gas wells, you need $3 before central Alberta's going to fire up," said Tonken. "But for the Montney producers, $2.50 Canadian goes around very well."
Keyera's Smith says the good news is that by shutting down gas plants, some of which were built in the 1950s and 1960s, there will be a reduction in greenhouse gas emissions as volumes are switched to newer facilities.
The bad news is that while some of the affected workers will be moved to other facilities — Keyera still operates 10 plants in central Alberta —some will likely lose their jobs.
This report by The Canadian Press was first published April 21, 2020.
Companies in this story: (TSX:KEY, TSX:BIR, TSX:TCP)