The challenges facing Canadian oil and gas companies are daunting – collapsed oil prices & demand amid the COVID-19 pandemic, regulatory uncertainty, Bill C-69, asset write-downs and credit crunch/liquidity challenges to mention some. For E&P companies carrying too much debt, despite calls for help with liquidity, the writing may be on the wall. In a recent interview with The BOE Report, Rick Peterson of Peterson Capital commented:
“It’s going to be tough and right now I think there is a big bull market in natural gas starting. I think that a lot of companies have disappeared and are not going to be back. But if I had to look at areas that I think are strong, I think the Montney is one. I am hearing from CEOs in Calgary that we are looking at extremely strong fundamentals for natural gas. Demand for natural gas in power generation is still strong and the LNG market in Asia is robust. We’ve seen an initial move off the bottom in some of the gas names, but I think we are still in the early innings of the game.”
As we see a lot of growth stall in the industry and decreases in growth plans, infrastructure companies’ abilities to contribute to recovery for E&P companies with reduced cash flows in high-efficiency areas are a welcome benefit. Some of the best producing areas in North America are in Western Canada- Montney and Charlie Lake for example. As we see a decrease in cash flow and a decrease in the ability for producers to fund their development, looking at infrastructure is becoming key. In a world where there’s less capital for producers to spend, they can eliminate spending on facilities and work together with an infrastructure company to fund facilities and then focus on their drilling and development which should produce a higher return for them than infrastructure investments on their own. The right set of circumstances and the right play factor in success. There are development opportunities especially in areas where there is excess capacity according to Chris Rousch, President and CEO of Veresen Midstream.
“We’re all in this together. Producers and Midstream companies need to be aligned to have mutually beneficial outcomes because while it is a competitive marketplace locally, we’re ultimately competing with other sources of energy in the global market. Infrastructure can be viewed as a cost, but there is opportunity to unlock so much value that thinking of it solely as cost as is wrong. We ask, how can we enable the monetization of the resource? How can partnerships with infrastructure deliver maximum value? How can infrastructure get you the best prices for your products, be it locally or globally?”
As producers find they are less profitable due to commodity price declines, and there’s less capital for producers to spend, the demand on midstream is to help with sustainability through collaboration, economies of scale, high utilization, and best operational practices.
“There’s a movement towards lower carbon intensity energy- renewables are only one part of it. Natural gas has the opportunity to displace coal and other heating oil and high carbon intensity commodities as the fuel of choice to complement renewable development towards a low carbon economy. The recent heatwaves in California are a good example of this. Due to the rolling blackouts, they were forced to turn off people’s power. Although renewables are a very valuable part of our energy system, this says to me that there is too much reliance on solar energy, and they likely need to think about how to balance that with low emission natural gas generation” says Rousch.
As we progress through the third quarter of 2020, the need to hear from the midstream sector has never been more real and they too have been impacted by the downturn. As reported by S&P Global, North American 2020 midstream impairments reached $15.8B in May with “the toll for each segment generally has been dependent upon the degree of underlying exposure to the liquids value-chain, including crude oil, oil sands, NGLs, and refined products.” Looking at Canadian midstream companies, the news is not necessarily so dire says Rousch, as many midstreamers are diversified in their counterparties. “ The risk of default of one customer is one thing but if you have twenty customers and one is in financial duress, it isn’t as detrimental as if you only had one” he explains.
It has become clear that LNG is a big win for the Western Canadian Sedimentary Basin. According to Rousch:
“My team has done a lot of work analyzing the impact LNG is going to make on Western Canada; we have concluded that LNG Canada is a huge win. We are extremely excited about the opportunity that being able to showcase Canadian natural gas on the world stage. There will be a distinct focus on natural gas development; something that has lagged due to low pricing in recent years. Veresen Midstream’s infrastructure, comprised of more than 1.5 bcf of gas processing facilities is ideally located both right in the heart of the Montney but also right at the inlet the Coastal Gas Link Pipeline, that will deliver natural gas to LNG Canada. We have had a lot of positive discussions with industry players around what this means for our business and the industry going forward. We’re creating a new market outlet. We are especially excited when we consider that this could be the first of many West Coast LNG projects.”
The Canadian LNG Alliance echoes Rousch’s enthusiasm, forecasting that Canadian LNG exports could hit 56mn t/yr. by 2035 as reported in The Petroleum Economist. Rousch acknowledges the long road Canadian LNG has traveled.
“Alberta has a long history of being at the end of the pipeline- the furthest supply source from the market, which has meant we’ve had to innovate to find a way to be cost-effective. But with LNG, Western Canada has a great cost advantage- we are closer to the Asian market versus the US Gulf Coast. Western Canada is one of the best places to acquire natural gas from a cost perspective, but just as importantly, our resources are developed in a responsible, sustainable way. We’re proud that Veresen Midstream’s gas processing facilities in northeast BC, which are powered by 100% renewable power, have been documented as having some of the lowest carbon footprint impact of any gas in North America. We work closely with our producer partners because they are constantly looking at ways to improve all aspects of ESG; Canada is already a global leader in this space. We are very responsible energy producers and we have the opportunity to showcase that to the world.”
The prognosis is good for some producers but what options are there for mature fields?
“We are of the view that infrastructure has a huge role to play in mature areas because there’s likely a lot of steel in the ground already. I think there have been some really good stories in some areas. My thought is it centers around what you are calling the new normal and what price forecasts you are making. Ultimately, you will have to compete with the best plays. The best development plays have great geology, low costs, driven by producers’ relentless focus on development efficiencies, paired with infrastructure optimization through midstream partners, will always be strong. We see the Montney as being a perfect example of this. It’s got great returns, very high productivity, highly decreasing capital costs. There are also evolving plays that over time will continue to ensure that Western Canada will stay competitive globally.”
Maureen McCall is an energy professional who writes on issues affecting the energy industry.