Copyright of the Daily Oil Bulletin 2018
Roundup Of Natgas Market Diversification Activities
Mostly by making commitments to transport hydrocarbons on a long-term basis to each market when a pipeline company embarks on a capital project to expand capacity, Brian Robinson, VP of finance and CFO, suggested that Tourmaline Oil Corp. creates an ability to send its gas from Western Canada to multiple markets.
He said: “This takes foresight, long-term planning, strong credit and a low-cost structure backstopped by a deep, repeatable drilling inventory.”
The company supplements market diversification with hedging and planned firm-service access on the NGTL system, noted Robinson. Tourmaline currently physically delivers gas to eight significant trading hubs — AECO, Station 2, California, Oregon, southern B.C. and Washington, as well as Ontario and the U.S. Midwest.
Subsequent to the completion of the second expansion, Tourmaline will have in aggregate about 300 mmcf/d of firm transportation on the GTN system. For April, the company has shipping access to an additional 100 mmcf/d of volumes (DOB, March 7, 2018).
“That is incremental to the 105 mmcf/d we have been shipping since last fall,” Robinson stated in an email. “In 2019, Tourmaline adds another 100 mmcf/d with the expansion in 2019, for a total of 305 mmcf/d by the end of 2019. Our total exports by the end of 2019 will be approximately 540 mmcf/d.”
As for other companies, Encana Corporation has diversified markets for Canadian gas with only four per cent of total expected company revenue exposed to AECO in 2018 and about five per cent in 2019 and 2020 (DOB, Feb. 15, 2018).
In Canada, the company diversified its physical and financial gas pricing to enhance margins. As of year-end 2017, Encanawas committed to deliver roughly 180,000 mmcf of Canadian-operation natural gas and about 44,000 mmcf of natural gas in its U.S. operations with terms under two years.
Seven Generations Energy Ltd.’s market access strategy continues to provide geographic market diversity and premium pricing in North American natural gas markets located away from the oversupplied Alberta market. About 76 per cent of 7G’s natural gas sales go to the U.S. Midwest and Gulf Coast. For 2018, 7G expects o sell roughly 10 to 15 per cent of its natural gas production into Eastern Canada (DOB, March 14, 2018).
In full-year 2017, about 40 per cent of Crew Energy Inc.’s production received Chicago City Gate pricing, which is up 20 per cent from 2016 due to strong industrial and retail demand exceeding the Canadian benchmark AECO 5A by 41 per cent (DOB, March 2, 2018).
With Montney assets uniquely positioned for physical connectivity to all three major natural gas export pipeline systems, Crew has flexibility and access to different markets, which includes firm service on TransCanada PipeLines Limited’s Nova system, which took effect on April 1.
According to the company’s Q4 financial and operational results, Crew has expanded its natural gas marketing portfolio over the past five years so as to include multiple sales points at favourable terms beyond 2020. Natural gas pricing exposure through Q1 2018 is roughly 44 per cent Chicago City Gate, 40 per cent AECO 5A, nine per cent Alliance ATP and seven per cent Station 2.
From Q2 2018 through the remainder of the year, the company has additional market exposure with roughly 40 per cent Chicago City Gate, 19 per cent AECO, 12 per cent Alliance ATP, 13 per cent Dawn, eight per cent Malin, four per cent NYMEX Henry Hub and four per cent Sumas.
About 39 per cent of Canadian Natural Resources Limited’s natural gas production is exposed to AECO and Station 2 pricing, while the company exports roughly 29 per cent of natural gas production to other North American markets or sells it internationally. It uses the remaining 32 per cent internally in its own operations.
During CNRL’s Q4 2017 conference call, management noted export pipeline capacity due to come onstream by 2020 will enable Canadian natural gas production to resume growth, as proposed gas pipeline expansions total about 2.5 bcf/d of export capacity out of Western Canada (DOB, March 2, 2018).
For 2018, ARC Resources Ltd. has physically and financially diversified its natural gas sales portfolio to multiple downstream markets that include the U.S. Midwest, Henry Hub, and U.S. Pacific Northwest markets, the company stated in its Q4 financial and operational results (DOB, Feb. 9, 2018).
Less than five per cent of ARC’s expected overall sales revenue is exposed to AECO and Station 2 markets this year. With continued expected volatility, the company will keep taking steps to mitigate risks. These steps include executing active risk management and physical marketing diversification programs.
Perpetual Energy Inc. reportedly has been able to insulate itself from volatile natural gas prices in part due to its market diversification contracts (DOB, Feb. 23, 2018).
During Q3 2017, the company diversified its natural gas price exposure from AECO by entering into arrangements to effectively shift the sales point of 34.1 mmcf/d to a basket of five North American natural gas hub pricing points for a five-year period commencing Nov. 1, 2017, increasing to 39 mmcf/d on April 1 of this year.
For 2018, the AECO fixed price will comprise 27 per cent of estimated production, while Empress gets five per cent, Dawn gets 11 per cent, Michcon gets seven per cent, Chicago gets 18 per cent, and Malin gets 16 per cent.
NuVista Energy Ltd. receives a AECO 5A gas price premium due, in part, to various gas marketing arrangements the company has in place to diversify and gain exposure to alternative markets in North America outside Alberta, thus limiting exposure to AECO pricing.
According to the company’s year-end financial and operational results, for Q4 2017 NuVista’s natural gas sales under AECO physical delivery sales contracts represented about 59 per cent of its total natural gas production during the quarter (DOB, March 12, 2018).
NuVista received Chicago Citygate pricing on roughly 19 per cent of natural gas production and Dawn pricing approximately on 22 per cent. The company has a contract in place for volumes to be sold to Malin starting in 2018.
Bellatrix Exploration Ltd. has diversified its natural gas price exposure through physical sales contracts that give access to the Dawn, Chicago and Malin natural gas pricing hubs (DOB, March 14, 2018).
Market diversification contracts as of March 13 of this year, and ending on Oct. 21, 2020, include 30,000 mmBtu/d to Chicago (half starting on Feb 1, 2018 and half starting on Nov. 1, 2018), 30,000 mmBtu/d to Dawn (half starting on Feb 1, 2018 and half starting on Nov. 1, 2018), as well as 15,000 mmBtu/d to Malin starting on Feb. 1, 2018. This long-term diversification strategy reduces exposure to AECO pricing on about 26 per cent of forecast 2018 gas volumes.
As part of its long term market diversification strategy, Painted Pony Energy Ltd. reduced its exposure to daily Station 2 pricing to less than 10 per cent in the last half of last year. For this year, according to the company’s Q4 2017 results, management anticipates Painted Pony Station 2 exposure to average below 15 per cent (DOB, March 8, 2018).
The company has diversified away from Station 2 by entering into financial and physical commitments, including contracting for transportation outside of the B.C. market.
Meanwhile, Advantage Energy Ltd.’s continued market diversification initiatives should result in revenue exposure to AECO prices of four and 28 per cent for Q1 and full-year 2018, respectively (DOB, March 6, 2018).
In addition to its Dawn market exposure, which comprises about 20 per cent of current production, the company recently added contracts to transport natural gas to the Chicago/Ventura U.S. Midwest markets, starting in November of this year, with an initial volume of 20,000 mmBtu/d and increasing to an annual average volume of 35,000 mmBtu/d in 2019 and 62,500 mmBtu/d in 2020 at a cost of about US$1.15 to $1.20/mmBtu.
Along with Advantage securing firm service increases to 2021, the most recent corporate presentation notes that the company has the ability to reduce future total service commitments through evergreen contract renewals.
“We feel fairly confident with our marketing diversification strategy right now,” Craig Blackwood, the company’s vice-president of finance and chief financial officer, told the DOB. “Also, while we are predominantly natural gas today, a lot of our drilling now is going into areas that are more liquids rich in nature. That helps to just broaden our product stream, and so we will have more liquids that will have more pricing subject to that. It’s another kind of revenue diversification we are doing beyond gas.”
The Advantage advantage; dealing with diversification risk
Advantage pays close attention to managing cash-flow risk, according to Blackwood, and in terms of natural gas market diversification the company has entered into a variety of agreements to expand physical product to different pricing points in North America. Also, the company prudently enters financial contracts to balance its methods.
“We continue to hedge at prices supportive of our development program, and we continue to develop liquids that provide us with another diversification of our revenue. With our low-cost structure, we can actually fix prices lower than many peers and still generate returns.”
He added: “It’s really about looking at the full cycle of cash flow generation for us. We keep our costs low. We manage our revenue price. We’re growing our liquids. All those are critical to our future success. And we are doing it in a very prudent way that is measured against this lower commodity-price environment.”
Advantage is a relatively small company, with about 30 employees and a “handful of individuals” to deal with a variety of marketing initiatives that include following most North American markets and pursuing opportunities. While some opportunities come directly from pipeline companies, Blackwood said others come from other producers.
“Other producers may have transportation commitments they’ve entered into but cannot fully fulfill, and so as a result there could be opportunities to pick up other services from those companies at prices that could be desirable.
“There are a multitude of different ways to execute [a marketing strategy], but it is basically about talking to the different pipeline companies, midstreamers, and we also have relationships with several marketing companies. They become aware of opportunities, and we might be able to optimize something.”
One of the challenges to physical market diversification would be the significant commitments involved. For example, noted Blackwood, if a company were to suddenly enter a 10-year transportation commitment, then that becomes a very significant take-or-pay commitment into the future. Not all companies are equipped with the balance sheet to afford such commitments.
“Also, when you enter these it basically also increases your cost structure, and so you suddenly have this firm commitment where you are paying to get to another alternative market, and are hoping the alternative market’s price is better. In some instances, it might not be better, and so you might have to fix one of your costs and not recover the costs that you paid. That is a risk as well.”
There are also operational risks, added Blackwood. For example, a company may have transportation commitments that maintenance outages or other curtailments could disrupt. While the company cannot transport its gas, in such instances it must still pay for the transportation. These physical diversification risks are part of the reason why pursuing financial options, such as hedging, are beneficial as well.
“If you do something financially, you can also do other structured deals and get in and out of positions without actually worrying about physical transportation, and there are never any curtailment issues. The market diversification solution is probably a bit of both. Both provide certain opportunities, but they also provide certain challenges as well.”
Full takeaway pipes essentially characterize the current impediment to market diversification, Robinson told the DOB, but Tourmaline will maintain its current strategy, recognizing certain markets perform well as others struggle. “We have been adjusting our development programs to extract more hydrocarbon liquids from our asset base, further enhancing revenue diversification.”
Potential petrochemical market growth for natural gas
The ability for the Heartland Petrochemical Complex and other petrochemical projects to turn hydrocarbons into plastic pellets is another important option Canada’s natural gas sector is pursuing, according to Jihad Traya, manager of natural gas consulting at Solomon Associates.
“Participation in that, again, requires sophistication and deep pockets. There are very few players who can say they actually want to directly participate.”
For example, beyond diversifying markets through pipelines to price-advantaged locations, in Q4 of last year 7G secured a new long-term agreement that supplies propane to Inter Pipeline Ltd.’s planned propane dehydrogenation and polypropylene Heartland project (DOB, Dec. 18, 2017).
This sales agreement will enable 7G to diversify its propane sales and capture stronger realized prices within the Alberta petrochemical value chain. The complex is expected to commence production in late 2021.
While this discussion of “pipes versus pellets” holds merit, Traya said the petrochemical market ultimately presents another problem to producers — creating plastic to make secondary products or to ship overseas requires a willingness to compete against others already in the plastic-making business.
“Your pellets are going to start displacing someone else’s pellets,” he added. “It is a growing market, but there are constraints to it.”
According to Edward Kallio, principal at consultancy Eau Claire Energy Advisory Inc., petrochemical plants use a lot of natural gas and could therefore increase demand, and they could help in terms of “clearing out the liquids of the basin” that are used for diluting bitumen. However, natural gas demand for the petrochemical sector does not approach the scale of demand usage for LNG.