B.C. Election Delivers Policy Win to Gas Sector Amid Looming Market Oversupply
The shock outcome of British Columbia’s provincial election positions natural gas producers in Northern B.C. and Alberta to thrive, with the new BC Conservative premier-designate Lorne Doerkson vowing to triple exports of liquefied natural gas by 2035.
Yet the industry’s producers, which include Calgary-based Tourmaline Oil Corp. TOU-T and Denver-based Ovintiv Inc. OVV-T will have to be patient. Substantial increases to LNG exports are years away, and natural gas in Western Canada remains in oversupply.
Because there aren’t enough ways to export the region’s abundance of natural gas, the local price, known as the AECO (Alberta Energy Company Ltd.) price, is depressed and currently hovers around US$1.40 per million BTU – roughly half the price of U.S. natural gas on the Gulf Coast, and a fraction of global prices.
Owing to the export bottleneck, natural gas producers risk pouncing on the premier-designate’s vision and boosting production too soon. If they do, the oversupply may worsen, hurting their profit margins. It could also discourage investors from buying back into the sector. Lately, they have been deterred by the supply glut, and they are also enamoured by the profit surge in Canadian oil.
However, the long-term potential of Canadian natural gas is real, particularly because wells in the Montney region in northern B.C. and Alberta are often filled with byproduct liquids such as condensate.
On Monday, Ovintiv – formerly Encana – bought Logan Energy for $890-million, adding natural gas and liquids assets in the area. The deal is Ovintiv’s fourth purchase in the Montney over the past couple of years. Previous transactions include the purchase of NuVista Energy Corp., as well as assets from Paramount Resources Ltd. and Advantage Energy Ltd.
The Montney region is known not only for its sizeable reserves, but also for the quality of its wells, which rival those in the prolific Permian Basin that straddles Texas and New Mexico. It is also affordable by comparison. The Permian has become an expensive place to purchase new land or assets, so producers are turning to the Montney instead.
“The two places that we really saw the potential for our company to deliver differentiated returns were the Permian and the Montney,” Ovintiv chief executive officer Brendan McCracken said in an interview.
He is particularly enthused about all the condensate found in the Montney natural gas wells. The product is used as a diluent that helps to move heavy oil through pipelines, and Mr. McCracken believes it is the best resource product in Canada – “the only one that attracts a global premium price.”
The Montney acquisition activity dovetails with B.C.’s new strategy. On the campaign trail, Mr. Doerkson repeatedly touted his “B.C. Energy Superpower Plan” to double LNG production by 2032 in the province, and triple it by 2035.
“We will deliver this by cutting red tape, faster permitting, faster approvals,” he said during a campaign announcement in September.
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B.C. is already well on its way to achieving this after Shell Canada announced in late September that it will greenlight phase two of its recently built LNG facility in Kitimat, B.C., enabling the company to double its production capacity.
The expansion follows Shell’s $19-billion acquisition of Arc Resources Ltd. in September, significantly boosting its natural gas reserves in the Montney region. Future production will be used to feed the export plant.
As for Ovintiv, Mr. McCracken acknowledged that expanded LNG exports will take years to materialize, but he said there are other opportunities and the company has found a way to sell 80 per cent of its Montney production to a diversified mix of buyers, so its not held captive by the AECO price in Alberta.
In fact, the Montney’s appeal is so strong that Ovintiv has retooled its corporate strategy to expand there.
Nearly two decades ago, Ovintiv – then Encana – was one of the first companies to bet on natural gas, and even sold off its oil sands assets into a new company called Cenovus Energy Inc. But the strategy backfired. When the oil sands assets were sold, the price of AECO gas was around US$11 per million BTU. By 2012, it had dropped to US$2 because new drilling technology unlocked vast quantities of so-called shale oil and gas in the U.S.
To pivot, Encana bet on U.S. shale oil and gas, moved its headquarters to Denver and renamed itself.
But now that Canadian energy has grown more popular – spurred in part by more favourable government policies – the company is happy to reinvest in the Montney again. And it is possible more rivals will buy Montney assets, too.
In a note to clients last week, BMO Nesbitt Burns analyst Jeremy McCrea wrote that Montney assets are attractive not just for their discount prices relative to the Permian, but the region also has a “high number of undrilled locations.” Companies with assets there often stress that less than 10 per cent of the Montney’s reserves have been produced.
This article was first reported by The Globe and Mail
