Copyright of the Daily Oil Bulletin 2017
ARC’s Diversification Strategy Cuts Western Canada Price Exposure To 20 Per Cent
By adopting a market diversification strategy a few years ago, ARC Resources Ltd. reduced its 2018 exposure to western Canadian natural gas prices to only about 20 per cent of its output, investors heard on Monday.
“For the last couple of years we've seen a supply crunch happening in Western Canada. And we've seen that [Western Canada] was going to be challenged to find markets,” said Ryan Berrett, vice-president of marketing.
The company ensured its costs are low enough to compete with the lowest-cost gas plays in North America. ARC has low operating costs because it typically owns its own infrastructure.
Given its low costs and Northern Border pipeline contracts, ARC can land gas in Chicago from its Sunrise project in British Columbia at a full-cycle cost of about C$1.90 per mcf, Berrett told the company’s investor day conference.
And he said for another C25 cents the company can land its gas at Henry Hub.
“When we think about a $3 Henry Hub price, which is around where it's been trading, that gives us a full-cycle netback of US$1.30, or $1.65 Canadian per mcf,” Berrett said. “And it shows that our economics compete favourably within North America.”
Though western Canadian gas prices rose recently with the early onset of winter, the AECO benchmark had dropped below zero in past weeks.
“This is something that we had planned for, and our strategy that we put in place over the past couple of years has allowed us to realize an incremental dollar per mcf to our gas price throughout the year,” Berrett told analysts.
ARC’s diversification includes a combination of physical and financial strategies, using multiple sales points to reduce risk.
In 2018, “we only have about 20 per cent of our gas exposed to western Canadian pricing,” Berrett said, referring to AECO and Station 2 pricing.
“We think this is something that is going to be prevalent for the next couple of years and we continue to take a long-term approach to our price-management strategies. ... We currently have a gas hedge book work over $260 million.”
About two weeks ago ARC began shipping gas to Dawn under TransCanada Corporation’s long-term fixed-price contract.
“We will have incremental gas moving into the Pacific Northwest later next year and in 2020. And we continue to evaluate multiple market access [options],” he added.
Also, new contracts to sell gas to southern Oregon kick in 2020, added Myron Stadnyk, ARC’s president and CEO.
He added: “Our team has done a really good job of looking ahead a few years.”
For example, transportation capacity for ARC’s Sunrise Phase 2, which comes onstream next year, was secured a couple of years ago. And contracts to get output from Dawson Phase 4, slated for around 2020, onto the TransCanada system are “well in hand,” Stadnyk said.
“So we have a pretty deliberate firm-capacity contracting that's three to four years ahead.”
In the longer term, billions of dollars of investment in new transportation capacity will prevent the kind of AECO price collapse that happened in recent weeks, ARC officials said.
But with gas production from the Montney far outpacing construction of new takeaway capacity, the current glut is no surprise, they said.
“We thought last year gas prices should have gone to zero. And they didn't because of the way TransCanada managed [it],” Berrett said. “A year ago TransCanada would cut firm-service receipts. So all of our production would get cut 20 per cent on our firm service receipt.”
He suggested the recent Dawn long-term firm transportation service is “probably the first step where there has been a very profound movement from the producer community to underpin capacity to get out of Western Canada. And I think that's probably a nearer-term solution to help rectify this issue.”
But until transportation capacity catches up with production capacity, producers have to be able to make money at gas prices between $2 and $3 an mcf, said Stadnyk.
He said ARC, which owns and operates its own infrastructure, has finding and development costs and royalty structures that can compete with the Marcellus shale gas play in the U.S. Northeast.
“I think you have to expect some of this tough gas price that we just saw in the past few weeks to happen again next year — until you see these physical changes made to the system on compression and rerouting the gas,” Stadnyk said. “And we're planning for that.”