Energy analyst weighs in on Alberta natural gas producers seeking government intervention
'The open letter … is a little bit devoid on details,' says Samir Kayande
Nine Alberta natural gas producers have written an open letter to the provincial government asking for mandated production cuts, but experts say while the problem is clear, what the producers are asking for is less so.
The letter, signed by the CEOs of the companies, calls on Premier Jason Kenney to show, "bold leadership and support their plan to restrict production."
Energy analyst Samir Kayande, with RS Energy Group, says we don't know exactly what these nine producers are asking for.
"The open letter … is a little bit devoid on details," he told The Homestretch on Wednesday. "It's more of a request for principles, but we don't really know what it going to look like."
But, Kayande says we do know why they're asking for help.
"The state of the natural gas industry is not good," he said.
According to Kayande there is the macro issue of too much gas in all of North America, which weighs on pricing.
'Insufficient transportation capacity'
But in Alberta there's also a unique issue.
"We think there there is insufficient transportation capacity for the amount of gas that is available to be produced," he said.
"Basically it's a problem of very high resource quality — which you think is good, because you can extract the resource relatively cheaply — but the problem is that you need a plan to get it to market and get it to users."
And right now, Kayande says there's a lot of bottlenecks in the system.
There are two TC Energy — formerly TransCanada — pipelines. The NGTL system which supplies gas into Alberta and picks up gas from producers, and then there is the mainline.
"Which fewer people are talking about but is actually we think a bigger issue weighing on natural gas prices," he said.
The open letter proposes to address TC Energy's NGTL system.
"Which I understand is a massive annoyance for a lot of producers who, when there's maintenance, have to curtail their gas.They can't produce it," said Kayande. "And they don't like it, just like you don't like it when you have to get off a plane from Calgary to Toronto because it's overbooked. Emotionally it's very similar."
The analyst says what producers are asking for is better allocation when a curtailment is required — similar to a voucher system.
"The issue is that it's not addressing the mismatch between a very high productive potential and the limited ability to build natural gas transportation at these low prices," he said." That's the fundamental strategic problem."
'You need more demand'
But, Kayande says the answer to that strategic problem is complicated and hard.
"You need more demand," he said. "LNG is a step in the right direction but it's only a small step. We could do five of those LNG plants and still be okay."
One of the fundamental issues Kayande sees is that Alberta is awash in natural gas.
"With oil you can say, 'oh we'll just build pipelines,' and that makes a ton of sense because at an oil price of say $50, it actually pays. You can spend $7 a barrel moving your oil and that works out and there's enough money there," he said.
"For a natural gas pipeline to deliver into a continental market that's $3 and if it costs you $1 to ship it, now your returns you're guaranteeing are pretty skinny, and that's tough."
Furthermore, Kayande says there are natural gas producers who say it's costing them more to produce the gas then they're making from production.
But, when it comes to government intervention, Kayande says it depends on what that intervention ends up looking like.
"The solution will have to come in the form of additional sinks for demand and unlike oil there is excess pipe capacity available on the TransCanada [TC Energy] main line," he said. "It's just not available at a price that producers can foot."
He thinks that if a deal can be reached around extra mainline capacity, it will certainly help in the short term.
"The other thing is the market is sort of sorting the issue out," he said. "Rig counts are dropping, investment is dropping and what that means that there's going to be less supply this winter. But, that's not the solution anyone likes."
With files from The Homestretch