‘A huge win for Canadian gas’: LNG dithering clouds natural gas rebound

The oilsands business is getting all the attention, but the Canadian exploration and production companies that made it through the oil downturn are also cautiously returning to growth.

Many are in the gas side of the business where the price outlook is encouraging, are digesting acquisitions that transformed them into sizeable players, and have slimmed down costs to keep themselves competitive with their U.S. counterparts.

Life would be close to perfect if they could get a liquefied natural gas (LNG) industry off the ground on the West Coast to open new export markets for Canadian gas, or some of the investor attention U.S. players are hoarding, thanks largely to their more supportive policy environment.

“We need (Canadian) provincial and federal governments truly behind the LNG business,” Mike Rose, president and CEO of Tourmaline Oil Corp., which has grown into a senior producer, said at the CAPP Scotiabank Investment Symposium in Toronto Wednesday. “It’s a huge win for Canadian gas. It’s the best thing Canada can do to replace coal generation in Asia … as opposed to a fantasy exercise” to reduce carbon emissions.

Rose expects drilling activity in Western Canada to rebound if natural gas prices keep strengthening.

“At the current gas price, I don’t think activity is really going to ramp up,” he said on the sidelines of the conference. “If gas goes up by 30 or 50 cents, I think it will.”

Tourmaline, which last fall acquired Western Canadian assets from Royal Dutch Shell PLC for $1.3 billion, produces 240,000 barrels of oil equivalent a day (about 84 per cent natural gas), making it one of Canada’s top oil and gas companies outside the oilsands. Many sold out or were forced to shrink significantly.

Longer term, Rose is optimistic for Canadian gas.

Demand in Alberta is rising as power generation moves away from coal, oilsands companies require more gas to fuel their growing operations, and global demand is growing.

“If you look at the overall energy in the world going forward … the one that is growing the most on a proportionate basis is natural gas, probably because it’s cheaper than renewables and it’s cheaper than oil,” Rose said.

AP Photo/Cliff Owen

Pat Ward, president and CEO of Painted Pony Petroleum Ltd., another consolidator, said it’s hard for gas companies to get market respect after more than a dozen years of depressed prices.

But he believes they are rebounding as demand for Canadian gas grows, in part because of sizeable exports from LNG terminals in the U.S.

“The U.S. guys started on LNG when we started on LNG (on the British Columbia Coast) and the U.S. is already exporting over 10 billion cubic feet a day,” Ward said outside the conference. “They are buying our Canadian gas for $2.50 Canadian and selling it to the Mexicans for US$3.50.”

Meanwhile, the Canadian LNG sector remains stalled, with only a small export terminal planned out of more than two dozen originally planned, following regulatory delays, aboriginal opposition, and changing market conditions.

I am just absolutely disappointed that as a country we dithered around pipelines and LNG

Painted Pony, which last month acquired private company UGR Blair Creek Ltd. for $276 million to bolster its position in the giant Montney shale gas play, expects to grow production to 70,000 boe/d at the end of the year, from 45,000 boe/d today. Its Canadian reserves are so large they are now bigger than those of former gas giant Encana Corp., Ward said.

“The resource that we have is stunning — for a company we just started ten years ago,” he said.

Jonathan Wright, president and CEO of NuVista Energy Ltd., another big Montney player, said there hasn’t been cost inflation so far this year in Western Canada, where many drilling rigs remain idle. But some cost pressures could come in the second half of the year if commodity prices continue to strengthen.

The sector is back to “firing on all cylinders” after many tough years, Wright said, though he remains concerned about Canada’s inability to reach new export markets for its oil and gas.

“I am just absolutely disappointed that as a country we dithered around pipelines and LNG,” he told the meeting. “We need to get on with business here.”

Financial Post