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The fickle fortunes of natural gas markets have Canadian petroleum producers bracing for weak prices during the first half of 2024 and some revising their spending plans.
Benchmark AECO natural gas prices in the province jumped sharply during the nasty cold snap and topped US$10 per thousand cubic feet (mcf) earlier this week, before quickly melting back into the $2 range, according to data from ATB Financial.
On Friday, the U.S. benchmark gas price dipped to US$2.25 per million British thermal units.
It’s a rocky start to the year, with executives and industry analysts expecting producers to respond to prices stuck in the doldrums.
Earlier this week, natural gas producer Birchcliff Energy cut its annual base dividend in half to 40 cents per common share.
The Calgary-based firm also announced it would delay drilling 13 wells planned for the first half of the year until later in 2024, representing about $80 million to $90 million of planned spending, said Birchcliff CEO Chris Carlsen.
(The company had set its capital budget between $240 million and $260 million.)
Carlsen, who took over the company’s helm at the start of the year from retiring CEO Jeff Tonken, said the changes announced Wednesday will give the company the option of bringing production online later in the year, when commodity prices should be higher.
“This is all in the spirit of protecting the balance sheet, based on what we see for the forward commodity prices,” Carlsen said in an interview Friday.
“I can tell you, the industry is looking at their capital programs. It’s not Birchcliff exclusive. We’re probably one of the first ones to adjust.”
Since the announcement, Birchcliff’s stock dropped 14 per cent on the Toronto Stock Exchange.
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Industry analysts expect weak prices for gas through the spring and summer, but an improvement later in the year.
ATB is forecasting AECO spot prices will average C$2.75 per mcf this year, while benchmark U.S. prices average US$3 per million British thermal units.
The U.S. Energy Information Administration recently projected spot prices for gas will average $2.70 per mmBTU, while expecting American gas production to grow by about 1.5 billion cubic feet per day.
Meanwhile, a new report by Morningstar DBRS said the North American gas market will likely remain weak through early 2024 because of higher-than-average gas in storage in the United States, currently hovering around 11 per cent above five-year levels.
Reduced heating demand is expected with the anticipation of a return to warmer-than-normal temperatures this winter.
Inventory levels going into the winter were elevated and prices have been “sluggish,” Victor Vallance, managing director with Morningstar DBRS, said Friday.
“We do see that supply is quite adequate in Western Canada, and certainly as well in the U.S.,” Vallance said.
“I think we will see more companies curtail spending, fewer companies direct spending money toward natural gas development.”
Despite the recent cold snap in Canada and the U.S. over the past two weeks, this winter has largely seen temperatures above normal with the influence of El Nino.
While Birchcliff led the way with its plan to shift spending and cut its dividend, other companies will also be looking at deferring capital or moving it to oil developments.
“What they are doing is very prudent. In our view, the Canadian gas market is likely to be very oversupplied for 2024,” said Dulles Wang of energy consultancy Wood Mackenzie.
“It means we could be seeing more producers doing cuts.”
A recent report by Wood Mackenzie said that with a surge in Canadian and U.S. gas production and storage inventories last year, the North America gas market is awaiting the arrival of another wave of LNG export projects.
Doug Dafoe, CEO of private gas producer Ember Resources, noted western Canadian gas storage levels are above average for this time of year, which has created pessimism toward what the prices will look like in the summer months.
However, the startup of the LNG Canada project — expected in 2025 — will increase demand and provide a new export outlet for western Canadian gas. Other LNG developments in Canada are in the works, including the proposed Ksi Lisims, Cedar LNG and Woodfibre projects.
Instead of progressing its capital program in January and February, Ember has decided to largely move its spending from early this year into the fourth quarter.
“We were all pretty optimistic going into the fall last year . . . but Mother Nature caught us again,” Dafoe said.
“Why would you produce your gas into a price environment like this?”
That’s why Birchcliff decided to shift spending and drilling into the back half of the year, prepared to watch for what happens with gas demand — and prices — in the coming months, Carlsen said.
“We’re trying to make sure that we protect ourselves for the downside . . . We see better pricing into (the fourth quarter) and into 2025, so it makes sense to bring those wells on later in the year,” he said.
“We are not giving up on winter, but certainly when you start it that warm, people get pretty pessimistic, pretty quickly.”
Chris Varcoe is a Calgary Herald columnist.
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