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Alberta’s battered natural gas producers, languishing in the shadows of the oilsands, can now take their grievances to Dale Nally — and they have plenty to complain about.
Nally is Alberta’s first-ever Associate Minister of Natural Gas, working alongside Alberta Energy Minister Sonya Savage, in Premier Jason Kenney’s new government. He is tasked with helping the beleaguered energy sub-sector recover after being stunted by persistently low prices, scrapped export projects and a lack of market access — issues that have been overlooked as larger industry players and governments have fixated on resolving the oilsands’ pipeline issues.
If we can get natural gas to global markets, it’s a game changer for Alberta
Alberta’s first Associate Minister of Natural Gas Dale Nally
“They absolutely have felt like the second cousins to Big Oil. And here’s the reality, if we can get natural gas to global markets, it’s a game changer for Alberta,” said Nally.
To gas producers, the appointment is a welcome signal the government grasps the extent of their struggles, which have been exacerbated by volatile prices and resulted in many bankruptcies and, in some cases, the liability for thousands of wells and facilities being transferred to the province’s Orphan Well Association for clean up.
“I think it’s a very good idea. I also think it shows the recognition and understanding that this industry is in crisis,” said Tristan Goodman, president of the Explorers and Producers Association of Canada, which represents companies that produce 60 per cent of the country’s gas.
On the difficulty scale of 1 to 10, it’s probably a 12
For Nally, the most pressing — and contentious — file is a resolution on the simmering dispute between TC Energy Corp. (formerly TransCanada) and producers over a 2017 policy change on the critically important Nova pipeline system, which moves the majority of gas in Western Canada to export points.
“I anticipate a lot of friction. On the difficulty scale of 1 to 10, it’s probably a 12. If we’re going to do this, it’s going to have to be a collaborative approach. Everyone is going to have to be prepared to move a little bit,” Nally said.
Many gas producers say TC Energy’s policy change causes gas prices in Alberta to collapse whenever there’s maintenance on the pipeline system because they have trouble accessing storage and are forced to sell the gas they can’t store at heavily discounted prices.
TC Energy kicked off a new round of maintenance on its Nova gas transmission network last week and since then natural gas prices within Alberta have fallen dramatically.
“TC Energy regularly engages with government to provide updates on our projects and operations. We will continue to work with our shippers on solutions to help strengthen the overall natural gas industry,” company spokeswoman Suzanne Wilton said in an email.
AECO natural gas prices fell a jaw-dropping 84 per cent in just a week in late May when TC Energy began conducting maintenance on the Nova system, falling from $1.70 per thousand cubic feet on May 23 to just 28 cents per mcf a week later. On Monday, AECO averaged 90 cents per mcf, which is $1.53 per mcf lower than the Henry Hub benchmark price.
A 2018 report commissioned by the previous NDP government called “Roadmap to Recover,” written by former gas and pipeline executives Hal Kvisle, Brenda Kenny and Terrance Kutryk, recommends the government push TC Energy “to reverse its July 2017 restriction protocol during maintenance periods.”
Nally wouldn’t commit to pushing TC Energy to reverse that policy.
“If we’re going to move forward on this, it’s got to be collaboratively. We don’t know the direction we’re going,” he said.
Still, producers believe alleviating the volatility in AECO prices should be a pressing short-term priority for the government.
“The issue I see is the volatility in that Canadian prices that get published every day is an additional vote of non-confidence for investing in Canada. Like, one of your commodities in this industry just bounces from sometimes negative to recently as high as $2.50 (per million cubic feet),” said Andy Mah, president and CEO of Advantage Oil and Gas Ltd., which produces from the Montney shale gas formation.
“It can, in a day or two, flip flop,” Mah said.
If the industry’s fortunes can change — either with new liquefied natural gas (LNG) exports, or additional pipeline access to new markets or petrochemical demand — the gas sector could once again become a critical economic growth engine in Alberta.
“If you think about it, it’s almost like we’ve got an equal amount of gas versus oilsands. In the old days, you’d talk about the oilsands being an elephant in terms of size — well, the gas is as big or bigger,” Mah said.
Nally said “there’s no silver bullet” to fix the province’s gas sector but said he’s committed to implementing many of the recommendations in the report by Kvisle, Kenny and Kutryk.
In fact, he said Kenney instructed him to read the “Roadmap to Recovery” report commissioned by the previous government before he was sworn in as associate minister. He said he’s now read it three times.
The newly minted ministry also takes some pressure off Alberta Energy Minister Sonya Savage, who has been focused on oil pipelines and regulatory issues. In an interview, she said she has “piles and piles of briefing binders” to read through on matters related to the oil side of the business.
“In the last few years, the issue of crude oil pipelines has been so prominent in the media and in public dialogue that we’ve forgotten about gas,” Savage said.
There is some overlap between the two roles. While Nally is overseeing the gas sector, Savage remains responsible for the ongoing commitments through the Petrochemical Diversification Program, also established under former premier Rachel Notley.
The program provides royalty credits to projects that would process Alberta gas into plastics such as polypropylene, ethylene or products like acrylic acid. Nally said the new government would honour existing agreements under the program, and may eventually announce new credits under the program to encourage the sector’s continued growth.
While producers believe the petrochemical program will provide some support in the long-run, they believe Nally can take measures in the short- to medium-term to address challenges the sector is facing.
Some within the gas industry believe the challenges facing small gas producers are so intense that many will collapse before the end of the year. Privately held junior Trident Exploration Corp., a Calgary-based gas producer, blamed a combination of low prices and high tax and regulatory costs for its decision to cease operating on April 30, when it foisted thousands of orphan wells on the province’s regulator.
“The combination of extremely low natural gas prices and high surface lease and property tax payments (totalling $0.72 / GJ) has exhausted the liquidity of the company,” the company stated in a release, announcing its 4,700 wells would be transferred to the Alberta Energy Regulator.
More companies in Trident’s position are expected to follow suit in the coming months.
“On the industry’s current course, I expect a wave of corporate bankruptcies this year, and with them, obligations will go unfulfilled and hundreds of millions of dollars of abandonment liability will hit the orphan well fund,” Jupiter Resources president and CEO Simon Berghazzi said on his company’s first quarter earnings call earlier this month.
“The Alberta natural gas sector is atrophying to a point where we simply will not have the capacity to bounce back, even if market conditions recover,” Berghazzi said.
• Email: [email protected] | Twitter: geoffreymorgan
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