Challenges Ahead for Natural Gas?
Transcript: Challenges Ahead for Natural Gas?
Canada's natural gas sector is a challenging sector in terms of the fundamentals that we're seeing. It's predominantly caused by basically oversupply of natural gas and a lack of takeaway capacity and that has resulted in depressed natural gas prices. There is an opportunity here in the wintertime for natural gas prices to potentially rebound and it's a short term opportunity here where we see production actually moderating here into the winter. In addition to which demand is actually picking up industrially in Alberta via oil sands projects and other industrial uses. Finally the last thing that could potentially move it up is inventory levels are actually quite low in Western Canada and what that's going to cause is, when the winter hits and people are actually heating their homes, it's going to draw a lot of the gas out of storage but because storage levels are low, this could potentially spike gas prices up. So short-term wise, there might be an opportunity here for natural gas but long term, we still look at it as a fairly challenging commodity.
The most recent news was Shell's announcement of an FID project on the West Coast, specifically in Kitimat. Now this is a significant project because it's about 1.8 to 2 BCF of gas a day. And to put that into context, Canada's entire natural gas sector produces about 13 to 14 BCF. So it's a very large substantial project. Now this project is not coming on until probably the 2021 or 2022 timeframe. So it's still a long-term project, but the implications are significant because of the scale. This gas is actually going to be exported off the west coast of Canada and transported to nations such as China, South Korea, and Japan, which are growing natural gas demand. Ultimately the project is still beneficial for Canada. We estimate upwards of US30 billion in terms of capital spend, if Shell goes ahead with all future phases of that LNG project and that's obviously significant in terms of job creation and GDP growth for Western Canada.
Interest rates are obviously a big component of the borrowing factor of these natural gas companies. So with interest rates rising, the cost of borrowing is going up for a lot of producers, not just natural gas producers, but generally energy producers as a whole. That said though, a lot of these companies have actually converted and fixed their balance sheets to the point where they rely a lot organically on their free cash flow now and less on borrowing, relative to history. And so while interest rates are obviously a negative, it costs more to borrow, most of these companies can organically fund a lot of their growth programs going forward. So it's actually a minimal impact at this point.
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