Natural Gas Tailspin Continues Despite Cold Snap
Long gone are the days of +$9/Mcf natural gas prices, as today opened with the commodity dipping below $2.50. And despite falling temperatures across the continent, dry gas continues its plunge below economic thresholds, urging a halt in any new drilling projects, perceivably until the price regains a level of $3.50/Mcf or more.
Historically speaking the price of natural gas has been tied to temperatures, and demand coming primarily from the industrial sector. While homes and their hot water tanks do require a draw on supplies, it’s the larger scale operations that require the heating of factories, the boiling of water and the generation of added electricity that can drive the price back up to economic standards. But in this case, the perfect storm is being created, causing natural gas to become the redheaded stepchild of the energy sector.
In the late 80s and early 90s, it was conceivable to profit in a market that saw spot prices of $0.50/Mcf, and caused cheers among producers when it topped $1.50. Today, the low hanging fruit is gone, and the costs of drilling, stimulating and producing have made $2.50 the break even mark for companies that are already producers, such as those operating in BC’s Horn River basin, while new drilling operations will be few and far between until it returns to $3.50.
Even the lowest cost producer, Encana Corp. [ECA – TSX, NYSE] is selling assets, with its most recent sale coming in December of its North Texas natural gas producing properties. Joint Venture partners are harder to come by in the larger scale operations, and data rooms are opening up like Sunday yard sales in head offices across Calgary to find deal seekers.
What’s happening is the combination of over-supply due to large scale frac operations, especially in shale gas coming from districts like North Dakota, West Virginia and Pennsylvania, along with a slowdown in the industrial sector which is demanding less of the good to keep the lights on (so to speak). The result has been a deep discount on mineral rights containing primarily dry gas, at least in Western Canada at this time, which has led to a drought of new natural gas explorers entering the scene.
For those who are following the scene, there may be light at the end of the tunnel. First off, this could be seen as the bottom out period for natural gas prices, although it still could slip further. A discount window has opened up, allowing gas properties to go for a fraction of the cost they drew not even five years ago. After the first land sale of the year for the province of Alberta, which still holds an abundance of natural gas in place, it appears that natural gas rights are cheaper than they’ve been in a long time.
Secondly, North America appears to be the island of cheap gas, as world prices differ wildly from those of the Henry Hub. Much of Europe is shelling out over $8/Mcf, and parts of Asia, including Indonesia, Korea and Japan are even higher. At some point the global market will be opened up, most likely through the proposed pipeline from the inland to LNG facilities in Kitimat, which would allow Liquid Natural Gas to sail freely across the seas to the highest bidder. While much attention is being poured into the hearings taking place over the Northern Gateway Pipeline for oil, natural gas tends to carry far less stigma when approached from an environmental critic’s standpoint.
As well, the other dark horse hope for natural gas producers could come in the form of Gas-to-Liquid technology, through the speculative plans between Talisman Energy [TLM – TSX, NYSE] and SASOL (South Africa’s National oil company) to build a multi-billion dollar processing plant to the north in either northeastern British Columbia or northwestern Alberta. The alchemy of gas-to-liquids has already been proven effective in Qatar through a partnership between Qatar’s national energy company and SASOL, and the diesel like fuel that’s been created from the process has successfully been used to power flights from Qatar Airlines. Though GTL is a long shot at this stage, should the building of the facility go through, a new market could open up to natural gas producers and possibly save the ailing commodity from economic extinction.
G. Joel Chury is a veteran investment columnist for Resource World Magazine and the Editor in Chief of VantageWire.com. His knowledge of both the mining and oil and gas sectors along with his ability to sift through TSX.V data and press releases makes him one of the best up-and-coming newsletter writers on the web.
With a diverse background that includes investor relations writing and consulting for publicly-held companies and previous field work as a surface land agent for oil and gas companies, Mr. Chury seamlessly translates technical results geared towards engineers and geologists into a more readable language that’s palatable for investors on the go. As well, Mr. Chury is an avowed silver bug, always willing to join the debate on where the precious metals market is heading.
Disclaimer: No information in this article should be construed as individualized investment advice. A licensed financial advisor should be consulted prior to making any investment decision. VantageWire makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the VantageWire only and are subject to change without notice. VantageWire assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this article and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. The author of this article does not currently own shares of any of the companies mentioned in this article. Furthermore, VantageWire assumes no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this article.
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May 30th, 2020
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