Radical Route Needed To Boost Alberta Gas Industry
The Alberta natural gas industry is in dire straits. In an open letter to Premier Jason Kenney, nine CEOs of primarily gas-producing companies recently begged the Alberta government to consider some sort of royalty tax credit scheme to support a voluntary curtailment plan in an attempt to stabilize gas prices at higher levels.
However, as we have seen with the mandatory program for crude oil, curtailment is no more than a Band-Aid, and it is highly questionable whether an Alberta gas plan would work, whether mandatory or voluntary. Alberta dominates western Canadian oil production, but B.C. is also a substantial gas producer, with 1.5 bcf/d of that province’s gas soon to flood Alberta — and our markets east — via TC Energy Corporation’s redirected North Montney Mainline.
What Alberta natural gas producers need are additional markets for their gas. Unfortunately, markets east of Western Canada are increasingly glutted by U.S. production, and this will likely only get worse over the next several years. Over one bcf/d of currently flared gas in the Permian and Bakken is currently being connected to the North American pipeline system and the first round of U.S. LNG liquefaction projects is coming to an end, resulting in a gas growth consumption gap over the 2021 to 2023 period.
This leaves large-scale B.C. LNG projects and the western Canadian gas market as the potential saviors for Alberta gas producers, especially with B.C. producers likely to grab any incremental market on the U.S. West Coast.
The first two-trains of the Royal Dutch Shell plc-led Canada LNG project are scheduled to start in 2024 and to be fully operational in 2025, but this will only benefit Alberta producers indirectly, assuming it diverts B.C. production from moving east — as all the project partners are planning to source their gas from B.C. Any other large-scale LNG projects sanctioned for B.C., which may or may not source gas directly from Alberta, would not come online until the second half of next decade.
As a result, through at least 2024, Alberta needs robust western Canadian consumption growth to re-energize the province’s gas industry. But it is questionable whether the traditional drivers of western Canadian gas consumption, industrial demand — and in particular, oilsands development — and gas-fired power generation will be enough to revive Alberta’s natural gas industry over the next several years. Alberta’s new associate natural gas minister, Dale Nally, may have to get creative and support some energy-intensive new industries to ramp-up the volume.
In a recent research note, Solomon Associates projected gas consumption in Western Canada to increase 1.7 bcf/d to eight bcf/d between 2018 and 2030, driven primarily by oilsands growth (3.6 per cent per year) and growth in gas-fired generation (1.4 per cent per year). Rising petrochemical production and the conversion of coal-fired plants to gas-fired ones are to be important contributors to the latter.
This is substantial growth, but it is unlikely to have a significant positive impact on Alberta gas producers through 2024, partly because regional growth in gas consumption is likely to be significantly weaker in the first half of the 2018-30 timeframe than the second half for three reasons: lack of egress retarding oilsands growth for the next several years; government mandated coal-fired retirements heavily weighted post-2024; and as a result, given the importance of the oil and gas industry to Western Canada’s economy, weaker economic growth in the first half than the second.
For example, on the oilsands front, the Canadian Association of Petroleum Producers (CAPP) is forecasting production to increase 581,000 bbls/d to 3.49 million bbls/d between 2018 and 2024, for average annual growth of 3.1 per cent. But energy efficiency has been improving by roughly 1.5 per cent per year for the oilsands industry since 2000.
Subtracting this energy efficiency improvement from CAPP’s annual growth rate and applying the result to estimated 2018 gas consumption of the oil sands industry, suggests gas demand will increase less than 0.2 bcf/d through 2024, compared to a 0.4 bcf/d jump based on Solomon’s forecasted growth for the oilsands — and both the CAPP and Solomon projections assume new crude pipeline capacity coming online in a relatively timely fashion.
Two industries the Alberta government may wish to encourage the province to boost regional gas consumption are new, unorthodox and highly energy-intensive — cryptocurrency mining and marijuana cultivation. It takes roughly 50,000 kWh of electricity to mine a single Bitcoin and 2,000 kWh to produce a pound of premium marijuana.
The competition to attract these industries is stiff, but Alberta has significant natural advantages, including low-cost gas, cold weather for at least half the year — for cooling computers and warehouses — low humidity, especially in the southern Alberta, and the rule of law.
“We can get really cheap power in Venezuela, we can get really cheap coal-based power in Kazakhstan or Romania, but the fact that you can get good stable government in Canada makes it a great combination,” said Andrew Kiguel, co-founder, president and CEO of Hut 8, the most prominent cryptocurrency mining company in Alberta, in October 2018.
According to blockchain research firm Coinshare, about 60 per cent of global cryptocurrency mining occurs in China, with Sichuan province alone accounting for half the global total due to low-cost hydropower from the Yangtze River. Miners in Sichuan province pay as little as 2.7 cents per kWh, compared to a negotiated 4.5 cents by Hut 8 for gas-powered electricity, according to Sean Clark, a former CEO of the company, at least for its Drumheller operations.
In terms of scale of energy use, Hut 8, with operations in Medicine Hat as well, presently consumes an estimated 563 GWh of electricity to produce 11,264 Bitcoins on an annual basis — extrapolating from second quarter results — which translates to 11 mmcf/d based on a 50 per cent conversion factor, or 0.23 per cent of Alberta’s total gas consumption in 2017.
A one million square foot warehouse, producing 200,000 pounds of premium marijuana annually, consumes around 400 GWh of electricity, 7.4 mmcf/d of natural gas, or 0.16 per cent of the province’s total gas consumption.
It should be noted that the cryptocurrency mining industry is more volatile than marijuana cultivation, with wild swings in Bitcoin prices negatively impacting the former. After skyrocketing more than 20 times in value to $27,000 in 2017, the price of Bitcoin dropped over 80 per cent in 2018. This led to two rounds of layoffs at Hut 8, the latest in early April of this year. Over the second quarter, the price of Bitcoin rebounded from about $5,500 to over $14,000, an increase of 158 per cent, significantly improving the fortunes of the company and the industry as a whole.
On the other hand, the energy intensity of cryptocurrency mining is likely to increase over time, as more mining operations compete to solve the algorithms to create a pre-set number of coins, whereas marijuana cultivators are already working hard to decrease energy usage to improve their competitiveness.
To conclude, Solomon Associates did not assume substantial growth of cryptocurrency mining and marijuana cultivation in its projection for western Canadian gas consumption — according to Cameron Gingrich, the company’s Calgary-based director of Strategic Energy Advisory Services — primarily because of the potential negative impact of the federal government’s carbon tax on attracting energy-intensive industries such as these to the region. Based on Solomon estimates, the present $20 per tonne federal tax adds $1.06/mcf to the price of gas and the $50 tax in 2022 will add $2.65/mcf.
At a bare minimum, in an attempt to encourage companies in these two industries to set up in Alberta, the Kenney government should offer to offset any carbon taxes these companies would have to pay to level the playing field with jurisdictions with no current plans to tax carbon, such as the U.S.