Thursday, December 27, 2007

Liquified Natural Gas Pricing Monitored Weekly in Canada

In an important sign of the times for the Canadian natural gas market, FirstEnergy Capital is now issuing weekly price updates about the global liquefied natural gas business.

Two years ago, when Canadian gas was exiting Alberta for America customers at more than $10 per thousand cubic feet, the about-to-burgeon LNG market was a cursory thought at best in most of the minds in downtown Calgary.

Now, as North American gas prices remain relatively low because of ample supplies of the commodity, LNG isn’t some abstract concept. Calgary producers suddenly realize they’ve got to compete against not only companies in the U.S. but sellers of natural gas around the world.

This was recently highlighted by EnCana Corp., Canada’s largest gas producer, whose CEO Randy Eresman said Alberta would have to “re-establish [the] competitiveness” of the province’s gas business. It is this sector that helps keep the treasury full, now under threat because of high costs, low prices and rising royalties—and ever-stiffer competition.

A year ago, gas producers in Calgary hoped low commodity prices, big supplies and full storage caverns were just a brief interlude that was rudely interrupting what had been a brilliant boom.

Then came this summer. Gas prices, unusually, were higher in North American than the United Kingdom and Japan—traditional destinations for LNG cargoes. So LNG poured into North America, helping fill available winter storage capacity for the second season in a row—likely ensuring no January-March boom in the price, even if the continent’s east coast goes through several deep freezes.

To make sense of it all, enter FirstEnergy, the Calgary-based independent brokerage founded in the early 1990s by a group of young bankers, including Murray Edwards. FirstEnergy does much of its business financing junior natural gas producers. Unlike the old days, the new competition to sell gas to Americans to heat their homes and fuel their factories starts in places like Trinidad, Qatar and Egypt.

Right now, FirstEnergy reports that imports of LNG in the U.S. is sitting at about a billion cubic feet a day, near a five-year low, a trend expected to continue through January. The figure is way down from a spike up to 4 billion cubic feet a day in the summer. That was the spike that helped fill storage for winter, keeping continental prices low.

LNG imports in the U.S. are low right now because the benchmark gas price in the country is at about $7 per thousand cubic feet (U.S.). By comparison, LNG producers selling their product in Asia can get as much as double that rate.

Canada exports about 10 billion cubic feet a day of gas to America. According to the Energy Information Administration, the U.S. imports roughly 20 per cent of its natural gas. For Canadians, the key stat is that the country is losing market share. In 2001, about 94 per cent of gas imported into the U.S. was Maple Leaf output. Last year that had fallen to 86 per cent—and fell to 75 per cent in July—before bouncing back towards 90 per cent in September.)

So, for Canadian producers, the hope is that LNG supplies continue go elsewhere and North America supplies will ebb (though they have been surprisingly strong in the U.S.).

Lower supplies stoke higher prices, good for struggling Calgary producers and their stocks (but bad news for all of us that heat our homes with gas). And if it’s a cold winter followed by a hot summer, that would be another factor that would push prices higher.

But hope is an effervescent thing to depend on in the hard world of business. With the boom of 2005 now a distant memory, and an unexpectedly difficult 2007, producers in Calgary are now stoic, some of whom are struggling to stay in business. The big world of LNG is just another in a stack of problems. Finding a way to reduce costs in Alberta will be the big challenge. The year ahead will certainly remain in the category of interesting times.

Postscript: (Natural gas has traditionally been a continental commodity, used near where it is produced. LNG emerged a number of decades ago but was only particularly relevant for countries such as Japan, which were without their own sources. Technology has improved, prices globally have risen and it looks like the LNG market in the next several years will become a global one. The gas at its source is supercooled to -160C, at which point it becomes a shippable liquid. The liquid is regasified at its destination and then moved onwards to customers by pipeline.

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