Developing the Right Solution to Meet Your Needs

Latest News

Natural gas strategy needs to be based on more than hope

There's the hope that the winter will be really cold - so that there will be a big draw on natural gas storage - and the hope that the summer will be very hot to increase demand for air conditioning, and thus natural gas.

There's also been the hope (though never really articulated in front of anything resembling a microphone) that hurricane season might result in some infrastructure being compromised - that could briefly boost prices.

Even Alberta's energy minister, Ken Hughes, used it last week in describing the challenge facing natural gas companies: "Gas producers are having a very difficult time. We have seen this kind of market develop before in history, but generally before there was always the hope ... prices would turn around in the near future," he said.

But hope - though the poet Emily Dickinson described it as the "thing with feathers" - is not a business strategy.

And the challenge with the natural gas producers is that they are their own worst enemy; a glimmer of a rise in prices usually translates into an increase in production to capture the value, however temporary. More production eventually translates into lower prices and the cycle starts again.

Thus, it is with a measure of relief that Alberta government's Standing Committee on Resource Stewardship announced a six-month review aimed at examining ways to increase the value of the natural gas produced in the province.

The heart of the issue is not that much different than what faces the oil producers, only when it comes to natural gas, the fuse is much shorter as prices struggle to rise beyond $2 per thousand cubic feet. Not much is economic these days.

In both cases, it's about security of demand. And in the context of the natural gas world, it's also about the need to increase demand, but not necessarily to the point where it causes other industries that use natural gas as an input, to be rendered uncompetitive. If Alberta were able to get off coal-fired power in short order and in the process significantly decrease its per capita greenhouse gas emissions, that would be a good place to start.

But it can't and shouldn't stop there.

Alberta's petrochemical industry is the result of the vision of former premier Peter Lougheed, leveraging the commodity into a valueadded product. Thanks to low natural gas prices, there has been resurgence in petrochemical manufacturing in the U.S., but Canada doesn't appear to be as aggressively exploiting the opportunity presented by the price drop in a key input.

For the longest time, it was Alberta's low natural gas price environment that gave the petrochemical producers a critical advantage; it's time for that message to be heard again.

In addition, Alberta and Canada need to work harder at broadening the export market for the petrochemicals manufactured in the province.

Of course the worry is that greater demand will cause prices to rise and a price advantage to erode. And, if basic economics functions the way it should, that's exactly what will happen - but companies can manage this, as they have in the past, through hedging and longterm contracts.

Against all this is the push to export natural gas to Asian markets in the form of liquefied natural gas.

It's what the government of British Columbia is pushing for and it would certainly benefit Alberta's natural gas producers.

Anyone attending the LNG conference in Tokyo last week would have heard of Japan's thirst for LNG for electricity generation purposes, following the shut down of its nuclear power plants.

Since the Fukushima disaster in March 2011, LNG imports have jumped 23 per cent and the country now accounts for 40 per cent of global LNG demand.

No wonder, then, that a B.C. government official was touting the advantages of his province as one of a number of preferred suppliers of LNG last week. But, B.C. is no longer the only game in town.

It wasn't two years ago that the U.S. was not moving as quickly on the LNG export front as Canada appeared to be. The worry was that exporting LNG would cause natural gas prices to rise domestically and quash a renaissance in petrochemical and other manufacturing industries.

In recent months, however, that sentiment appears to be changing and a foot race is taking shape. Three LNG export licenses have been approved in the U.S. and the same number in Canada - and expectations are the number will increase south of the border.

The question then becomes which country holds an advantage? On the one hand, Canada, with its cooler climate - which means the cooling horsepower required might not be as high - holds an advantage over U.S. Gulf Coast sites. It also doesn't take as long to get from the B.C. coast to Japan as it does from Louisiana.

On the other hand, Canada's proposed sites are in remote areas, which means higher costs to build and access the facilities as compared with the U.S. refining complex, where the infrastructure is already established. One need only look at Australia and the ballooning costs of projects underway there, to understand the challenges presented by remote sites. At issue too, is at what price will the LNG contracts be inked? The preference is to have them linked to the price of oil, but there is a sense the willingness for buyers to do that is waning.

There is no question the Standing Committee on Resource Stewardship has a significant task before it, not the least of which is balancing the interest of both consumers and producers.

But what's clear is that Alberta - and Canada - can no longer have a natural gas strategy predicated on hope. There needs to be certainty for producers, consumers and investors so that a greater benefit can be wrought from what is an abundant resource.

Deborah Yedlin is a Calgary Herald columnist dy edlin@calgaryherald.com