Gas in U.S. Cheaper Than Canada's Signals Imports to Slide: Energy Markets
Gas in U.S. Cheaper Than Canada's
Derick E. Hingle/Bloomberg
Natural gas sits in storage tanks at the Amerada Hess gas processing plant adjacent to the Henry Hub, a facility operated by Chevron Corp. subsidiary Sabine Pipe Line LLC, in Erath, Louisiana.
Natural gas sits in storage tanks at the Amerada Hess gas processing plant adjacent to the Henry Hub, a facility operated by Chevron Corp. subsidiary Sabine Pipe Line LLC, in Erath, Louisiana. Photographer: Derick E. Hingle/Bloomberg
U.S. natural gas has dropped to its cheapest level in 11 months relative to Canadian supplies as production surges, threatening a slump in imports from the nation’s northern neighbor.
Benchmark prices at the Henry Hub in Louisiana were 5 cents below gas at AECO in Alberta, Canada’s largest hub, on Nov. 8, the biggest discount since Dec. 11, according to data compiled by Bloomberg. It was $1 higher than AECO gas as recently as July and August and has been an average of 85 cents more expensive than the Canadian benchmark price for the past 10 years.
U.S. output is surging as companies increase drilling for gas from shale formations. Production of the fuel will rise in 2010 to the highest level in 37 years, the Energy Department in Washington said Nov. 9. U.S. imports through pipelines, 99 percent of which come from Canada, and via LNG shipments will fall 11 percent to a net 7.33 billion cubic feet a day this year compared with 2008, the lowest amount since 1998, it said.
“Imports from Canada will likely see further deterioration, given the simultaneous growth of low-cost U.S. shale production and large-scale pipeline projects that will enable these supplies to compete head-on with Canadian production,” said Teri Viswanath, a director of commodities research at Credit Suisse Securities USA in Houston.
Gas at the Henry Hub rose 11 cents, or 3 percent, to $3.79 per million British thermal units yesterday, bringing its decline in 2010 to 35 percent, according to data compiled by Bloomberg. AECO spot gas advanced 8 cents, or 2.3 percent, to $3.64 per million Btu, down 34 percent this year.
Record Supplies
U.S. gas stockpiles climbed to an unprecedented 3.843 trillion cubic feet in the week ended Nov. 12, the Energy Department reported today. Storage of the fuel in Canada rose to 638.3 billion cubic feet in the week ended Nov. 5, the highest level since at least 2002, according to Canadian Enerdata. Canada accounted for about 14 percent of U.S. supply last year.
The slide in prices prompted Calgary-based Encana Corp., Canada’s largest gas producer, to scale back its investment and production outlook last month. The company will defer about $200 million of its proposed $5 billion in spending until next year, according to an Oct. 20 statement. Output will climb about 12 percent to the equivalent of 3.315 billion cubic feet daily compared with 2009, it said. The company previously forecast a 15 percent increase.
‘Unsustainably Low’
“North America’s ongoing oversupply of natural gas production has driven prices for the near term to levels that we believe are unsustainably low,” Encana Chief Executive Officer Randy Eresman said in the statement.
Gas for December delivery on the New York Mercantile Exchange fell 2.3 cents to settle at $4.007 per million Btu today. The futures have tumbled 28 percent this year.
U.S. net gas imports from Canada may drop 2 billion cubic feet a day from current levels by 2015, Bentek Energy LLC, based in Evergreen, Colorado, said today in a report.
Rising production of shale gas and pipeline expansions “will facilitate the ongoing U.S. production boom and keep downward pressure on what are already some of the lowest gas prices in the past two decades,” Bentek said in the report. “This in turn will increasingly squeeze Canadian imports out of the U.S. market.”
U.S. gas production will average 61.49 billion cubic feet a day this year, the highest level since 1973, the Energy Department said in its monthly Short-Term Energy Outlook published Nov. 9. Production from shale wells rose 71 percent in 2008 from a year earlier to 2.02 trillion cubic feet and will account for 34 percent of output by 2035, compared with 17 percent in 2008, department data show.
LNG Exports
Rising U.S. production is encouraging energy companies to turn to export markets for customers, requiring the construction of liquefaction plants to cool the fuel into a liquid that can be put onto ships.
Kitimat LNG, a company 51 percent owned by Houston-based Apache Corp., plans to build an export terminal in British Columbia that would start operations in 2014.
Houston-based Cheniere Energy Inc. said it aims to develop the first LNG export terminal in the lower 48 states at Sabine Pass in Louisiana. Exports may start by 2015, Cheniere said in a statement. Morgan Stanley Capital Group Inc. signed an agreement with Cheniere on Nov. 8 to use the export terminal.
“Now both Canada and the U.S. may become LNG exporters,” said James Williams, an economist at WTRG Economics, an energy research and analysis firm in London, Arkansas.
Cargo Prices
LNG for delivery in 30 days sold for $9.45 per million Btu yesterday in East Asia and $7.52 in Northwest Europe, according to Spectron Group, the brokerage owned by freight-derivatives broker Imarex ASA.
Exporting LNG becomes profitable so long as prices are $2 to $3 above Henry Hub gas, according to Paul Posoli, head of global power, gas, coal and emissions at JPMorgan Chase & Co. in Houston. JPMorgan exported a previously imported LNG cargo from the Cheniere-owned Sabine Pass terminal in Louisiana in June, according to the Energy Department.
“It’s pretty unusual to see Canadian gas becoming more expensive,” said Martin King, an analyst at FirstEnergy Capital Corp. in Calgary. Exporting to the U.S. “hasn’t been financially attractive.”
There were 163 rigs drilling for gas in Canada in the week ended Nov. 12, according to Houston-based Baker Hughes Inc., down 10 percent this year. U.S. gas rigs totaled 955, up 27 percent in 2010.
Horizontal rigs, which are mostly used for shale-gas drilling, fell by three from a record high to 940.
LNG imports will total 1.27 billion cubic feet a day this year, the Energy Department said on Nov. 9, down 31 percent from 1.83 billion estimated in February.
To contact the reporter on this story: Moming Zhou in New York at Mzhou29@bloomberg.net
To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net
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