Lamphier: Cheap natural gas can work to Alberta’s advantage

 

 

 
A natural gas well flares against a setting sun near Tomslake, B.C.
 

A natural gas well flares against a setting sun near Tomslake, B.C.

Photograph by: Ed Kaiser, file , edmontonjournal.com

EDMONTON - The natural gas market finally showed flickers of life this week, on the heels of a relatively upbeat report from Goldman Sachs.

Natural gas for June delivery closed Friday at $2.19 US per million British thermal units (MMBtu) on the New York Mercantile Exchange, up seven cents on the day.

The previous gas contract for May had slumped to a low of less than $1.91 per MMBtu on April 19th, the lowest near-month contract price in more than a decade.

But recently announced production cuts, rising demand for cheap natural gas from power plants, and unusually cool spring weather have helped to prop up prices. At least for now.

In a report issued Tuesday, Goldman Sachs said near-month contract prices could climb back to the $4 level by winter, as output slows and colder weather returns. The January 2013 gas contract on NYMEX currently sits at $3.27 per MMBtu.

This week’s price spurt triggered a flurry of renewed interest in natural gas stocks, with EnCana’s shares up nearly 13 per cent, ARC Resources up six per cent, and Talisman gaining 4.5 per cent.

Still, with U.S. inventories at record levels, some analysts say the mini-rebound in the commodity price may be short-lived, with the ultimate trough still ahead, perhaps around $1.50.

Whether the lows for the current cycle have already been reached or whether they lie ahead, natural gas prices remain light years below historical levels, and roughly 85 per cent below the 2008 highs of $14-plus.

Although the issue was barely touched on during the recent provincial election campaign, it has weighed on investors for months. Even after this week’s gains, EnCana’s shares remain some 40 per cent below their 52-week high.

For Alberta, there is a potential silver lining to this gloom, however. Since natural gas is a key feedstock in the manufacture of petrochemicals, there is growing interest in building new chemical plants here.

“We actually just came back from a trip to Texas,” says Neil Shelly, executive director of Alberta’s Industrial Heartland Association.

“There was a big petrochemical conference down there. A bunch of us went down to talk to a number of companies, and there is a lot of interest,” says Neil Shelly.

“We’re still at the tire-kicking stage, but because of the growth of shale gas and the whole quantum shift that has caused in energy prices, people were almost giddy down there.”

Last week, U.S. giant Dow Chemical unveiled plans to build a major new petrochemical plant on the Gulf Coast. The plant is part of a $4 billion expansion program at Dow’s operations in Texas and Louisiana.

A month earlier, Royal Dutch Shell announced plans to build a similar $2 billion chemical plant in Pennsylvania, near the prolific Marcellus shale gas play.

“Other chemical makers are eyeing major investments along the Gulf Coast, which is near major shale-gas sources in Texas and Louisiana,” The Wall Street Journal recently reported.

Chevron Phillips Chemical Co. — a joint venture of Chevron Corp. and ConocoPhillips — is one of the key players. It’s pursuing plans to build a new plant near Houston that’s part of an ambitious $5 billion expansion in the region.

Shelly says it’s too early to say which companies may look at establishing or expanding operations in Alberta’s Industrial Heartland, where they can take advantage of even cheaper natural gas prices than in the U.S.

“There are a couple of companies we’re talking to. We can’t disclose the names because it’s confidential. But there have been three delegations that have come up here to learn more about the Heartland, and as a result of our trip to Texas, we’re getting more phone calls,” he says.

“They were bragging that they’ve got the cheapest natural gas in North America, and I said: ‘Well actually Alberta is cheaper. If you look at the AECO price, it’s running 40 to 50 cents cheaper than the NYMEX price.’ So it is creating a lot of interest. It’s a whole new set of opportunities for us,” he says.

“A lot of what we’ve talked about in the past has been around upgrading bitumen, with the BRIK (Bitumen Royalty In Kind) program. But I think the new opportunity is to tap into natural gas, and that has ramifications for the whole province.”

glamphier@edmontonjournal.com