A bad start to the year for Canadian natural gas producers is getting worse after wildfires in northern Alberta knocked out oil-sands operations that represent a key source of demand.
Spot gas prices in Western Canada have been cut by more than half after oil-sands developers curtailed about 40 percent of their supply, reducing the amount of gas used to generate power for drilling and upgrading projects. Canada’s AECO spot gas fell to 53 cents U.S. per gigajoule on Monday, the lowest closing price since 1997, according to data compiled by Bloomberg.
Demand lost during the wildfires is another blow to drillers coping with a supply glut and competition from shale output in the U.S. East. Canada’s explorers had already been turning off unprofitable production after a mild winter led to record volumes in storage for the season, sending prices tumbling.
The blazes that forced the evacuation of more than 80,000 people from the energy hub of Fort McMurray since May 3 disrupted oil-sands operations as power and pipeline supplies were cut. The shutdowns took out an estimated 900 million cubic feet a day of gas consumption, or 25 percent of Alberta’s demand at this time of year, according to FirstEnergy Capital Corp.
“This could be one of the worst years since the mid- to late ‘90s in terms of average pricing,” said Martin King, an analyst at FirstEnergy in Calgary, commenting on the low prices. ”It’s pretty ridiculous.”
Gas producers most affected will be those that haven’t hedged large volumes of output, exposing the companies to low spot prices, King said. That could mean drillers that can’t currently make money may be forced to turn off more wells, he said.
While Birchcliff Energy Ltd. is among unhedged gas producers, the downtime is only expected to last one to two weeks, said Dennis Fong, an analyst at Canaccord Genuity Corp. in Calgary. He rates the stock a buy because of the company’s low-cost business model.
Gas is used in oil-sands operations to produce the power that generates steam for drilling operations and upgraders that turn heavy bitumen into light synthetic crude. Producers including Suncor Energy Inc., Royal Dutch Shell Plc, Syncrude Canada Ltd. and ConocoPhillips are among those that cut oil-sands volumes amounting to about 1 million barrels day, according to IHS Energy.
While companies are making plans to restart production, that depends on the availability of power supplies and pipelines shut during the fires. Power flows from Alberta oil-sands cogeneration units were at 46 percent of the capacity Tuesday, up 4.2 percent from a day earlier.