Not many commodities are hot anymore; investors are quite comfortable shunning the segment. But perhaps you may want to know about a commodity that in contrast is particularly overheated these days.
Natural gas firm service transportation out of Alberta, for the upcoming winter season.
Firm service prices are being bid up to unusual levels, even in the face of a relatively low commodity price forecast. Producers appear somewhat panicked about their ability to access markets for their natural gas. This is understandable; current market conditions for AECO-priced gas are extremely shaky with some forecasts of sub $1 gas for the next few weeks due to capacity constraints. This happens not infrequently whenever there is a pipeline outage for western Canadian production, which has few market options. It is also a sign of the times that the producers are desperate to access markets that are in the shadow of potential US shale output, which could spring to life at the sign of any price increases. That’s not normal behaviour, it’s an indication of how few options gas producers have.
This might seem an inconsequential irritant to the industry, the only byproduct of which would be cheaper gas for consumers. But it’s actually a big red flag warning of underlying problems. And then, right on top of this fiasco, lands the news that the $36 billion Pacific North West LNG export terminal will not proceed . Petronas, the major partner in the project, politely blamed market conditions, which might be believable were it not for the numerous US LNG export facilities marching towards completion.
Canada is about to have two of its major economic engines strangled into near oblivion while we stand around and watch. First was the oil sands, and now natural gas development is being throttled. As a country, we are playing with fire. Or maybe more accurately, putting out a fire that we’ve been relying on.
We all know that oil sands investment has pretty much stopped dead, knocking out one of the bigger lights in the Canadian economy. Natural gas might follow a similar path if it becomes a stranded commodity that can only be sold at ridiculous discounts. It is true that both the Alliance and TCPL systems are working to handle substantially more gas in the next few years, but that gas will still be destined for highly competitive US markets that already are digesting growing shale production. The result will be reduced netbacks all the way to Canada.
Capital will not flow into Canadian natural gas developments indefinitely when the only markets are severely discounted ones; at some point investors will tire of pumping money into a sector whose product sells at 20 year lows (and they maybe already have). Lower corporate netbacks and decreased investment levels may not make headlines immediately, but those factors surely will prick up ears when people hear about government deficits growing by tens of billions.
The Canadian economy is under attack on multiple fronts. The softwood lumber industry is once again getting slapped around by the US. If one removes lumber, and oil and gas from Canada’s economic equation, or large parts thereof, there will be a massive government revenue gap and the only way the economic equation can be balanced will be to slash the spending side, such as on our vaunted social safety nets.
Oil, gas and lumber are tough shoes to fill for the nation. Manufacturing is big for southern Ontario, but not so much for the rest of the country. Hydroelectric energy is great, now that it’s been built, but creating any new dams will (or should) trigger the same blizzard of outrage that any petroleum based megaproject now does. Please don’t point to other green energy sources for economic salvation; Ontario’s fiasco of subsidizing renewable energy sources has created an unsustainable and bizarre power market where consumers can’t afford the power bills and renewable energy sources reap huge benefits, all through the miracle of unsustainable mountains of government debt.
Canada is a resource-based nation. We may want to get away from that, and at some point we will, but if we decide to make the big switch in the near future we’d better be ready for the pain that will be part of the ride. We can’t continue in a half hearted manner where we accept low returns by keeping our product from markets where it will be welcomed. That only serves to make our production schemes uncompetitive in a global marketplace, and we’ve seen recently how quickly capital can evaporate when better opportunities exist elsewhere.
The environmental movement cheers these sorts of things, because any hindrance to petroleum development is a good thing in their eyes. If they get their wish, the world will get to witness firsthand the effects of strangling one of the world’s strongest, safest, cleanest, and most progressive economies, because the debt fairies won’t hang around forever to watch it all implode. And on the flip side, for those who think strangling Canada’s energy sector will save the planet, remember that Canada in total is responsible for about 2 percent of global greenhouse gases. There is nothing Canada can do short of shutting itself down that will have a meaningful impact on global emissions.
Wake up, Canada! We are presently a resource-based economy. Every resource based economy on earth tries to diversify, but it’s not easy. It won’t be for us either. No matter how green you see the future, the path to get there must be a gradual one to avoid economic chaos. For now, our social infrastructure and standard of living are financed by natural resources, and we are accepting a fraction of the value we could be getting by strangling ourselves in red tape and second guessing. To get to a green future, we must first not kill the golden goose.
Either get behind energy megaprojects by demanding more of our politicians, or be prepared for a substantially reduced standard of living. The death of these developments, one by one, impacts us all.
Read more insightful analysis from Terry Etam here