By Scott DiSavino
May 11 (Reuters) - For a brief moment this week, Canadian
natural gas was basically free.
While oil producers fretted over what production shut-ins,
caused by a massive Alberta wildfire, would do to the price of
Canadian crude oil, those same producers are big buyers of
natural gas, and without them the price dropped to just C$0.05
per thousand cubic feet (mcf) on Monday. A shut-in is when the
product is available but not able to reach the market.
"It was essentially free at the lows on Monday," said Martin
King, an analyst at Alberta energy advisory FirstEnergy (NYSE:FE) Capital,
noting that these were the lowest AECO prices on record going
back to at least 1985.
Oil sands companies around the Canadian energy center of
Fort McMurray, Alberta, began to restart operations on Tuesday
after the wildfire forced a week-long shutdown.
During the wildfire shutdowns, producers were not using gas
to fuel cogeneration power plants that generate electricity and
the steam used to cook the oil sands to produce crude.
As a result, the Canadian benchmark AECO hub in southeast
Alberta averaged less than C$0.50/mcf on Monday, at one point
dropping to an intraday low of just 5 cents, King said.
Natural gas prices have rebounded somewhat. With the return
to production of one oil sands cogeneration plant at the
Syncrude project this week and the expected restart of others in
coming days, AECO prices have already climbed to around C$1/mcf.
But the high level of gas in storage after a mild winter
means prices are expected to remain relatively cheap for the
rest of the year, according to analysts.
AECO prices averaged C$4.47/mcf in 2014 and C$2.78 in 2015,
but just C$1.62 so far in 2016, according to FirstEnergy.
To avoid filling Alberta's inventories to their maximum
capacity, some drillers will likely have to cut output later
this summer if they are not able to sell more gas to the
already-oversupplied U.S. markets.
"Some producers will likely be forced to shut in some output
because they won't get a decent price for their product, and
some of the gas that is produced will probably make its way to
the oversupplied U.S. market," said Kent Bayazitoglu, director
of market analytics at energy consulting firm Gelber &
Associates in Houston.
The biggest gas producers in Alberta include units of Encana
Corp ECA.TO , Repsol SA REP.MC , Canadian Natural Resources
Ltd CNQ.TO , Cenovus Energy Inc CVE.TO and Husky Energy Inc
HSE.TO .
Canadian Natural is planning to shut in an additional 40
million cubic feet per day (mmcfd) by the end of 2016 because of
low gas prices, a spokeswoman said, adding the decision was made
before the wildfire outages. Canadian Natural said last week it
already had about 43 mmcfd of gas shut in due to low gas prices.
"We've seen a couple of small producers in Alberta shut-in
gas production due to low prices in recent months, but Canadian
Natural's planned shut-ins may only be the tip of the iceberg
based on how low AECO prices are," said Richard Redash, managing
director, natural gas, at energy consultancy PIRA.
LOW PRICES ATTRACT U.S. BUYERS
The low prices attracted U.S. buyers. So far in May, net
imports of gas from Canada have averaged 5.6 billion cubic feet
per day (bcfd), up from 5.4 bcfd in April. That is an increase
of about 15 percent compared with the same period in 2013-2015,
according to Thomson Reuters Analytics.
FirstEnergy estimated the loss of oil sands usage due to the
fires cut gas demand by as much as 0.6 to 0.9 bcfd. At the high
end of this range, this is about 25 percent of all Alberta gas
demand for this time of year. Much of the gas not used will go
to Canadian storage facilities, they said.
The problem is that storage in Alberta, as in the United
States, is already at record levels after a mild winter.
Utilities pulled only 16 bcf out of Alberta storage between
Nov. 1, 2015, and March 31, 2016. That compares with about 111
bcf withdrawn during the winter of 2014-2015 and 334 bcf during
the polar vortex winter of 2013-2014, according to FirstEnergy
data.
The amount of gas in inventory in Alberta currently stands
at around 428 bcf, putting current storage near the province's
maximum capacity of 470 bcf, FirstEnergy said.
To avoid overfilling inventories going forward, FirstEnergy
said drillers, especially those that are unhedged and exposed to
spot prices, will have to shut in an estimated 0.6 to 0.8 bcfd
of gas production during the summer and autumn.
Canadian drillers have already cut the number of rigs
drilling new oil and gas wells to just 36, lowest number since
at least 2000, according to services company Baker Hughes Inc
BHI.N .
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Factbox on status of oil sands cogeneration plants
Graphic-Canadian natural gas prices plunge http://tmsnrt.rs/1T6DcHX
Graphic-Canada wildfire shuts crude capacity http://tmsnrt.rs/1T6HcrN
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