“Alberta and its natural gas producers face a daunting crisis,” Alberta’s Natural Gas Advisory Panel said in a report in December, highlighting the challenges that natural gas producers in Alberta face in market access and pricing for their commodity.
Industry officials and analysts say that the situation with the steep natural gas discounts in Canada to the U.S. Henry Hub benchmark is similar to the huge discounts of Canada’s heavy oil benchmark—the Western Canadian Select—to the U.S. benchmark West Texas Intermediate (WTI).
The record-low oil prices in Canada have attracted a lot of media attention in the past few months, but the steep discounts and volatile prices of Alberta’s natural gas have received less attention, although the pricing and problems are similar.
“It’s absolutely a similar situation,” Advantage Oil and Gas president and chief executive Andy Mah told the Financial Post.
Like oil, natural gas prices have also been suffering from the steep discounts, but the attention has been on oil “because of the slower decline in natural gas prices,” Mah told Geoffrey Morgan of the Financial Post.
According to Samir Kayande, director at RS Energy, the natural gas prices discounts have been plaguing the industry for longer and the problem has been “far worse than it is for oil.”
“Gas is such a forgotten commodity now,” Kayande told the Financial Post.
Alberta’s government has recently taken drastic measures to prop up the price of heavy oil in Canada, but it has yet to address the distressed natural gas pricing.
Natural gas “is just as important (as oil), it’s just not getting the same kind of attention as oil” but that could soon change, a government official told the Financial Post.
Late last year, Alberta said it had started negotiations to invest in additional crude by rail capacity to move 120,000 bpd out of the province for three years beginning in late 2019.
In the most drastic measure yet, the province of Alberta mandated an oil production cut of 325,000 bpd for three months starting January 2019, to clear the current glut and lift Canadian oil prices.
The glut and the resulting low oil prices cost Canadians US$58.6 million (C$80 million) a day, Premier Rachel Notley said in early December.
According to Advantage Oil and Gas’s CEO Mah, the natural gas price discount costs Canada around US$16.9 million (C$23 million) in lost revenues a day, or US$6.6 billion (C$9 billion) per year.
Alberta has taken steps to address the natural gas price discounts, although they have not been as drastic and as intervening as the ones to ensure higher prices for Western Canada’s oil.
Last month, Alberta set up a Liquefied Natural Gas (LNG) Investment Team “to work directly with industry on reducing barriers for securing final investment decisions on export projects that will increase the value of Alberta’s natural gas resources.”
“Whether we’re talking about oil or natural gas, the details are different but the story is the same. Albertans are getting pennies on the dollar because we can’t get our resources to international markets, and our biggest customer has become our biggest competitor. We can’t sit on the fence like previous governments did. We must take the bull by the horns and fight for the full value of our natural gas,” Alberta’s Minister of Energy Margaret McCuaig-Boyd said.
The creation of the LNG Investment Team is in response to a recommendation in Alberta’s Natural Gas Advisory Panel report published in December.
“Traditional markets for Alberta natural gas are oversupplied. Prices, and therefore industry and government revenues, are crushingly low and have been increasingly volatile locally since the summer of 2017,” the report said.
“Our dominant export market is now our primary competitor, and western Canadian gas will struggle to retain, let alone grow, its market share within North America. This reality represents an existential threat to western Canadian gas production if not addressed emphatically by Canadian natural gas producers, pipeline companies, and governments,” according to the panel.
The panel came up with 48 recommendations to the Government of Alberta, including to “consider direct Government of Alberta participation as a long-term shipper or credit provider.”