Terry Anderson says he didn’t see a synchronous global bull market for natural gas coming, but he is pleased ARC Resources Ltd. closed its $8.1-billion deal to become Canada’s third largest gas producer just in time to reap its rewards.
“It has all played out very nicely for us, but I don’t think we can honestly say that we predicted that gas and oil would have turned the corner so fast,” said Anderson, president and CEO of ARC Resources Ltd., of his Calgary-based company’s blockbuster deal for Seven Generations Energy Ltd. this year.
The deal closed in April, mere months before natural gas prices began a sharp climb and gained 50 per cent over the summer. The Henry Hub benchmark price traded for US$5.10 per thousand cubic feet on Monday — a price that is 200 per cent higher than the US$1.69 per mcf average for Sept. 2020. ARC Resources’ stock has jumped 88 per cent year to date to $11.40 per share.
Forecasters believe the “darkest of winters” is coming for energy consumers, but it will be a windfall for natural gas producers who can expect their best winter heating season in seven years.
The bull market is being fuelled by low gas storage levels globally, an insatiable export market and a weak supply response that could inflate other energy commodity prices including thermal coal and crude oil.
In Europe and Asia, where analysts are concerned about natural gas shortages, prices are setting seasonal records. In the U.K., natural gas imports settled above US$26 per thousand British thermal units on Monday, an all-time record, and in Asia liquefied natural gas prices hit US$27.50 per mBtu.
A sharp rise in natural gas prices will also have implications beyond the energy sector. Gas molecules play an important but often overlooked role in a wide range of industries, including electricity generation, plastic manufacturing and even in supermarkets, where “dry ice,” which is solid CO2, is used to store frozen food for transport.
On both continents, forecasters warn of rolling blackouts or brownouts, which would hurt a still broader range of industries including manufacturing. In Europe, the energy shortage is spreading to the fertilizer industry and threatening the meat sector, risking tighter food supplies and even higher prices.
Some energy observers believe that ambitious climate policies are not in tune with the reality of the world’s current energy needs.
“The very same voices who argued that investment in gas supply has to stop as a climate policy tool now declare that it is inadequate gas supply rather than climate policy that is responsible for skyrocketing prices,” Laszlo Varro, a former chief economist at the International Energy Agency, who is now with Royal Dutch Shell Plc, said in a note on LinkedIn. “While the current market tightness is primarily due to a robust demand it is a useful case study on how the economics of a supply restriction driven transition could unfold. A well designed, demand-focused climate policy would lower gas prices as better efficiency and renewables reduce gas demand.”
But policymakers are trying to reduce consumption by restricting supply without changing the sources of power plants.
“In such a situation supply would have to be rationed by skyrocketing prices, leading to factory closures, energy poverty risk for lower income families and similar consequences whose social acceptance remains to be seen,” Varro wrote. “The current market situation should refocus the policy conversation on reducing demand rather than artificially restricting supply.”
The surge in energy prices could also complicate new climate change policies being devised to mark the COP26 climate change conference in November.
As such, despite the temptation of high commodity prices, the North American supply response to bullish global natural gas prices has been tepid. Canadian producers have boosted their production by roughly 3 per cent, or about 500 million cubic feet per day. American companies have added some drilling rigs in Louisiana’s Haynesville natural gas formation and private companies have drilled additional wells in Texas’s Permian oil basin, where natural gas is a by-product of drilling for crude.
“We’ve heard more about capital discipline over the last three or four years than we saw. Now, we’re actually seeing it,” said Jen Snyder, managing director at Enverus, a firm that aggregates and analyzes energy data.
She said that years of low natural gas prices beginning in 2014, and punctuated by the “shock treatment” of the COVID-19 pandemic, has forced gas producers to rein in spending and return more of their profits to their shareholders rather than drill new wells.
Current drilling activity is not enough to balance the market and banks now forecast higher natural gas prices as demand surges. National Bank Financial upped its 2021 full-year NYMEX natural gas forecast by 28 per cent to US$3.70 per thousand cubic feet on Monday.
Citigroup expects the Henry Hub benchmark will trade in the US$6 per thousand cubic feet range to end the year.
“It’s certainly inflationary,” said Ed Morse, managing director and global head of commodity research at Citi in New York.
The inflationary pressure from rising natural gas prices will be felt most directly in power markets, because an abundance of cheap natural gas in recent years has displaced coal-fired power generation in Western Canada, the United States and in Europe.
U.S. Energy Information Administration data shows natural gas-fired power generation makes up the largest share of American electricity generation at 40.3 per cent, followed by nuclear energy and renewables at 20 per cent each.
As natural gas prices rise, coal-fired generation, which makes up 19 per cent of the U.S. grid, will become relatively more competitive and experts expect to see some gas-to-coal switching in the power grid this year.
“There’s definitely going to be a knock-on effect on power prices,” said Ian Archer, director at IHS Markit in Calgary.
In Alberta, where natural gas has also displaced coal-fired power generation in recent years, power prices are now expected to average $95 per mega-watt-hour through 2021, more than double the average of $46.72 per MWh from 2020, according to EDC Associates Ltd. in Calgary.
Blake Shaffer, economist at the University of Calgary, said he has locked in his utility prices ahead of the winter and would suggest consumers consider do the same. Many utilities in the province’s power market allow consumers to lock in for a year with no penalty if they want to switch back to a floating rate in the spring.
Vitol Group, the world’s biggest independent oil trader, believes that high natural gas prices will also lead some utilities around the world to switch to oil as a fuel source this year, creating an additional 500,000 barrels per day of oil demand and leading to crude oil prices above US$80 per barrel in the near term, according to Bloomberg. U.S. West Texas Intermediate (WTI) crude futures was trading at US$75.36 a barrel, after hitting its highest level since July the previous day.
Still, Citi’s Morse said North American gas producers shouldn’t expect to see the same extreme prices for extended periods as consumers in Europe and Asia because the continent continues to produce gas and because LNG terminals should put “a cap on North American prices.”
“The U.S. and Canada are an incredible hub of the (global gas) system and we didn’t used to be that way,” Morse said.
The North American gas market is about 100 billion cubic feet per day, of which roughly 10 per cent, or 10 bcfd, is exported off the US Gulf Coast at LNG terminals.
“Gas was a continental commodity for a long time because we didn’t have the different big gas basins connected via shipping and now with LNG we do. So I think we’ve finally got to the point where gas is a global commodity,” said Darren Gee, president and CEO of Calgary-based Peyto Exploration and Development Corp.
“I think when we’ve got 10 per cent of the North American market connected to the rest of the world, that is enough to have the rest of the world’s prices affect North American prices,” he said.
Concerned about those connections to global markets, Industrial Energy Consumers of America sent a letter on Sept. 17 to U.S. Energy Secretary Jennifer Granholm asking her to take “immediate action” to curtail LNG exports off the U.S. Gulf Coast in an effort to “prevent a supply crisis and price spike.”
In fact, American LNG exporters are increasing their capacity and commissioning new liquefaction trains at Venture Global LNG’s Calcasieu Pass terminal and at a sixth train at Cheniere Energy’s Sabine Pass LNG terminal.
ARC Resources is one Canadian company that could be poised to enjoy those higher global prices, as the company it acquired last year had contracts in place to liquefy its gas at an LNG terminal on the U.S. Gulf Coast.
The bull market arrives for Canadian gas producers after years of low gas prices across the continent and sometimes even negative commodity prices at the AECO pricing hub.
“It feels like 10, but really it’s been about five years of low prices,” ARC Resources’ Anderson said.
Source: Financial Post