Despite some bone-chilling weather in the eastern part of the continent, gas supplies in storage in the United States are more than 50 per cent higher than last year with just days left before the end of the winter heating season.Handout
Every once in a while, life surprises you by playing out as predicted.
It's what happened in the natural gas market this winter, and for an energy industry preoccupied by the crash in oil prices, it's not a good thing.
Despite some bone-chilling weather in the eastern part of the continent, gas supplies in storage in the United States are more than 50 per cent higher than last year with just days left before the end of the winter heating season.
The result: Wholesale prices are stuck below $2.80 a gigajoule in Alberta, according to the NGX electronic exchange, at a time of the year when they are often driven higher by the prospect of having to refill inventories and meet demand for summer cooling. More than one forecaster predicted this scenario last autumn.
Alberta gas fetched $4.54 a year ago, when the polar vortex triggered a gargantuan spike in demand. That's a 38-per-cent drop from that period, and many signs point to an extended trough in a North American gas industry that has proved so agile at drilling away any jump in prices.
For Canada, the outlook is particularly worrisome for the next several months, with new pipeline capacity from massive U.S. gas deposits set to feed the Midwest, a market that's long been considered rock solid by Alberta and B.C. producers. Four pipelines currently carry supplies into the region from Canada.
The 2,700-kilometre Rockies Express Pipeline to Eastern Ohio from Colorado started operations six years ago just as the shale revolution was taking hold. Owned by Tallgrass Development LP, Sempra U.S. Gas & Power LLC and Phillips 66, it carries up to 1.8 billion cubic feet of gas a day eastward.
Around midway through this year, the pipeline will start to ship Appalachian gas westward into the Midwest as part of a reversal project, and more volume will be added over the next year and a half.
Canada's export markets have already been eroded in the U.S. Northeast and even Southern Ontario, where relatively cheap supplies from the prolific Marcellus shale formation have flooded in.
This bodes ill for Canadian market share, and threatens to widen the gap between U.S. and Alberta pricing – the so-called basis differential, Martin King, an analyst at FirstEnergy Capital Corp., told investors and oil executives at a meeting in New York this month.
If there's one thing that the Marcellus producers have proven, it's that they can ratchet up production on a dime. A year ago, U.S. storage volumes sat at just 822 billion cubic feet – 55 per cent less than the five-year average – raising fears that the industry would struggle to replenish underground inventories, driving prices higher.
In the subsequent seven months, though, the storage chasm closed, displaying how the industry has become capable of just-in-time delivery. The last weekly U.S. industry report pegged stockpiles at 1.47 trillion cubic feet.
The tale of two winters played out in pricing. In the first three months of 2014, U.S. benchmark gas averaged $4.72 (U.S.) per million British thermal units, after some days jumping above $6. So far in the first quarter of 2015, it's averaged $2.82. The next couple of months are considered a shoulder season when prices normally weaken between peak demand periods for heating and cooling.
It all means that consumers are likely to keep enjoying a break on their utility bills. But for energy companies, and Alberta Premier Jim Prentice, it's a thorny problem.
Producers are already hamstrung by falling cash flows owing to the collapse in crude prices, so Canadian output is sure to decline with falling rig counts. Currently, as the spring slowdown begins, just 14 per cent of the country's drilling rigs are operating, compared with 36 per cent a year ago, according to the Canadian Association of Oilwell Drilling Contractors.
For the Alberta government, which is set to release its most austere budget in years on Thursday, gas markets are providing no shelter from the oil-price storm that has sapped provincial resource revenues.
One potential benefit? More companies might switch to gas from coal for their power generation needs to take advantage of the bargain prices. That and the improving U.S. economy might provide some support to North American prices. Longer term, planned liquefied natural gas export terminals are expected to offer new markets.
But, after the experience of the past five months in Canada's gas business, it's tough to justify veering from predictions of more weakness this year.
Jeffrey Jones