Canada's natural gas industry crisis ‘more acute’ than oil: Peter Tertzakian

The following Q&A with Peter Tertzakian, executive director of ARC Energy Research Institute, is part of the new Alberta Oil & Gas Quarterly, which can be downloaded for free here.

We’ve been hearing that a crisis is underway in Western Canada’s natural gas industry. Is it?

I do think it’s a crisis on many dimensions. It’s in many ways a good news, bad news story.

The good news is that with modern technology and innovation, which started with the shale gas revolution, we’re able to bring far greater quantities of natural gas out of the ground with a lower footprint, at a much lower cost.

If you contrast that against where we were a dozen years ago, the reverse was the case where costs were going higher and higher [and] we were on the proverbial treadmill where it was becoming harder and harder to offset declines.

The good news is that the ability to manufacture gas out of the ground has improved substantially. The other side of that is that if you don’t have the takeaway capacity, then you very rapidly create a glut and the price collapses and is very sensitive to the seasonality which is associated with natural gas.

It’s a dramatic loss of revenue to companies, but more importantly to Albertans as the resource owners.

How do the offtake issues facing the natural gas industry compare to those facing the oil industry?

It’s more acute on two dimensions. In Eastern Canada there is head-to-head competition with U.S. shale gas producers. In other words, our prime customer doesn’t need as much of our gas at the same time as we’re able to produce more at lower cost. The outlets in Western Canada are [also] unable to cope with the extra quantities.

The hope always has been, for I think over 15 years, that an LNG facility will be built so that we can have alternative markets and really large takeaway capabilities. Hopefully that’s finally going to come to pass in the next few years.

How large of a role does Western Canada currently play in “the new natural gas economy,” to replace coal globally with LNG, and to produce more petrochemicals?

In Alberta and Saskatchewan, if you look at natural gas consumption, it’s risen dramatically. In Alberta it’s because of oilsands consumption, which is not really the new economy, but there has also been displacement of coal, which has been in part facilitated by renewables but in part also by natural gas.

In Saskatchewan there’s been quite a dramatic increase in natural gas consumption, and there it has been a coal substitution as well.

Is Alberta’s goal of increasing its participation in the growing global natural gas economy within reach?

I think it finally is. LNG Canada construction is underway, scheduled for [completion in] 2024 to be conservative. That’s only a little over four years away by the time it’s all said and done, so that’s tangible.

The flip side is it’s probably going to be another four years of difficult prices. There are some new pipeline takeaways that are being constructed, so we might see some respite by 2021, but the next 12-24 months is quite challenging.

What impact will the new petrochemical projects being built in Alberta have on the market in Western Canada?

They are definitely good for the demand side, but in terms of the big picture we need to have takeaway capacity measured in billions of cubic feet. The typical petrochemical plants are measured in the hundred million, one-tenth of a bcf, so really it’s a matter of scale.

What view do you think investors currently take of Western Canada’s natural gas industry?

I think this is definitely a low point. I think this summer is going to be a low point, by all accounts.

In that regard, one can view it opportunistically, but I would say that investors are cautious because they’ve heard the hope-for-LNG story. Investors in oil and gas are very much in a ‘show me’ mode. I think they’ll be waiting to see.

Having said that, on the value-added side it’s a different kind of investor, for petrochemicals or other uses of natural gas domestically.

What they see here is a long-term, stable supply of natural gas that is unlikely to be as volatile in price as it has been historically.

Investors into the value-added side of it are already coming and I think you’ll see more of that, potentially enhanced by the UCP government’s stated intension to reduce the corporate tax. I think that will probably stimulate more interest in value-added companies, not just petrochemicals but any energy-intense [project] or any company that uses natural gas as a feedstock.

What will you be watching in the coming months?

I think all eyes remain on the LNG really, because the North American market is very saturated with gas, [it’s] very competitive, and so we need to have the outlets to export the gas to get premium pricing and ease the bottlenecks.

Download the Spring 2019 Alberta Oil & Gas Quarterly.