Canadian producers restructuring to survive lean ’11

Canadian natural gas firms are bracing for lean times in 2011, with the price of their product expected to remain weak a while longer.

CALGARY — Canadian natural gas firms are bracing for lean times in 2011, with the price of their product expected to remain weak a while longer.

“Producers that are heavily natural gas weighted are having to work hard to restructure their business model, so that they can continue to survive and thrive in what looks like to be an extended period of low natural gas prices,” said Gary Leach, head of the Small Explorers and Producers Association of Canada.

Junior producers, most of which are focused on natural gas, are determined to keep their costs as low as possible, Leach said. Some are looking at hedging — entering contracts to sell their product at a set price for a set period of time — but even still, it’s been tough to fetch a decent price.

Producers are chasing after oil instead of natural gas, if they can, since oil prices are so much stronger than natural gas, Leach said.

“We have an industry that is going in two directions based on commodity prices. Some companies are successfully straddling both worlds. And those that have opportunities to increase their crude oil production are trying to do so,” he said.

AJM Petroleum Consultants is expecting Alberta natural gas prices to average $4.10 per 1,000 cubic feet in 2011. The picture for 2012 is only a little brighter: the consultancy is calling for prices of $4.50, a 25-cent cut from its previous forecast.

Canadian gas has been pushed out of its main market, the United States, because of the high loonie, a supply glut south of the border and some of the U.S. government’s economic recovery measures, said AJM economist and vice-president Ralph Glass.

“We have to maintain bargain basement prices to keep natural gas moving until we develop viable alternative markets. That will mean a tough year for Canadian natural gas producers,” Glass said.

An export facility is being planned for the West Coast port of Kitimat, B.C., which will enable Canadian gas to flow to Asian markets. Start-up of that terminal is still at least a few years out.

The year is off to a decent start, said Don Herring of the Canadian Association of Oilwell Drilling Contractors, which represents firms that provide drilling and other services to producers.

The CAODC is expecting about 60 per cent of Western Canada’s rigs to be at work during the first quarter, typically the busiest time of year for drillers.

“Certainly all the signs that we’re getting here would indicate that we’re on track to meet that kind of a forecast. It is very much an oil-driven forecast,” said Herring.

Of the natural gas that is being exploited, most contains valuable liquids, a key feedstock for the petrochemical and plastics industries. Run-of-the-mill dry natural gas is being drilled mostly to allow companies to keep their land positions or fulfil their contractual obligations, Herring said.

The “bread and butter” rigs that make up a large part of Western Canada’s fleet can drill for both oil and gas. Heavy rigs geared toward horizontal wells are in high demand, whereas lighter gas-focused rigs are short on work.

“The part of the fleet that has been designed to drill gas is underemployed, so there are some folks there that are certainly not as optimistic and pleased,” Herring said.