What's Surprising Me Most about Canadian Natural Gas

From guest analyst Keith Schaefer......

Western Canadian gas exports to the United States could be completely displaced into Northern California by....

1. Abundant, low cost US natural gas production,
2. And by several new gas pipelines in the US,

Says a new market study by Bentek, a US energy analysis company. Overall, Canadian gas exports to the US will drop 2 bcf/d over the next few years, almost 30%, and this impending loss of the northern California market builds upon the loss that western Canadian gas has in lower exports to the US northeast. Increased Canadian demand and declining Canadian supply will pick up some of the slack, but it won’t be enough to offset a significant loss of exports to the US market in the near term, they add.

Bentek’s report, titled “The Big Squeeze”, is a report that also outlines how fast growing production from the Marcellus shale in Pennsylvania is displacing Canadian gas to the lucrative Northeast US market, and how new pipeline capacity carrying low cost gas out of the Rocky Mountains is now set to displace much of Canadian gas to the US Midwest and lucrative California markets.

“What we outlined in our study was complete displacement of Canadian gas into Northern California by the summer of 2014,” says Jack Weixel, Director of Energy Analysis for Bentek.
Last summer I wrote about how the new $6 billion Rockies Express pipeline, or REX, going from Colorado to Ohio, was displacing western Canadian gas production by almost 10%. Lately, US natural gas production from the Marcellus shale has also been displacing Canadian gas to the US Northeast. Canadian suppliers have been able to send more natural gas into the Midwest and Western US to help make up for that drop.

But Bentek says even that market is at risk, and Canadians could see this market get curtailed within the next two weeks, in early December 2010. That’s when low cost Rockies gas supply will start flowing east on the newly installedBison Pipeline. This will give Rockies producers an additional 0.5 Bcf/d (billion cubic feet per day) of capacity out of the Powder River basin in Wyoming. The Bison connects into the Northern Border Pipeline, which moves mostly western Canadian supply.

Weixel expects the Bison Pipeline to create stiff competition for Canadian gas. He says Canadian gas has to get cheaper to stay competitive. “They (Canadian gas producers) need to drop 14 cents (an mcf). Let’s say Rockies gas is $3.50/mcf - that means that AECO (the Canadian natural gas benchmark price out of Edmonton) needs to be priced $3.36 to be competitive in northern California,” says Weixel, adding that the breakeven price for certain Rockies gas producers in the Pinedale and Jonah tight sands plays is “well below $3 per mcf.”

Weixel expects net Canadian exports to drop 2 bcf/d through 2015, out of a total of 6.9 bcf/d now. But it’s not all gloomy for producers – and their shareholde“At the same time exports are declining, you’ve got Canadian demand growing, primarily from oilsands in the west and coal retirements in the east,” he says. “You’ve also got production slipping from conventional gas plays in Alberta. So there is a tightening supply demand balance.

“Traditionally that would lend itself to gas prices getting stronger. But we believe that due to the drop in exports, that there will be just as much gas on hand in Canada as there is now. So if production drops 1.5 bcf/d but exports drop 2 bcf/d, they’re up half a “b” a day.
Canadian gas production is actually going up because of the unconventional plays in BC (read: MONTNEY), but Weixel says the gas rig count in Alberta dropped off a cliff this September, and is about half the number it was last year and about one quarter what it was in 2008.

What’s surprising to me is how little both the industry and investors appear to be concerned about this issue. The Calgary Herald ran a small story on this, and The Daily Oil Bulletin, which is ready by the industry only, ran a story (masthead, or lead story). There are thousands of high paying jobs at stake – mostly in Alberta but also in northern B.C.


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China: Is a Housing Bubble, a Fragile Economy, and an Agricultural 'Doomsday' Scenario Possible?

From Rick Bradner, at the Oil and Gas Bulletin.....

I’ll preface my remarks by stating my bias up front. I love China, the Chinese people, the food, the chaos, the confusion, the expectations, and all the contradictions. I’ve traveled there more than 10 times in the last 20+ years and have just returned from a 5 week visit. I lived and worked in Kunming from 1997-1999.

First, a brief recap on how we got here:
China has been in a more or less constant state of upheaval for the last 100 years beginning in 1912 when a revolutionary military uprising led to the provisional government of the Republic of China being formed in Nanjing by Sun Yat-sen. This republican government was fragmented and fairly powerless. Following the death of Sun in 1925, China descended into a more or less constant state of civil unrest including the Sino-Japanese War (1937–1945) ending in 1949 with the defeat of Chiang Kai-shek by the Communist forces of Mao Zedong. A range of policies aimed at social engineering such as “ the 100 Flowers Campaign”, “the Great Leap Forward” and “the Great Sparrow Campaign” added greatly to the human toll wrought by the drought of 1959-60. It was estimated that at least 25 million and possibly as many as 35 million Chinese died due to famine.

This was followed in short order by “The Cultural Revolution” which officially ran from 1966-1976 and ended with Mao’s death. Among other things, The Cultural Revolution brought the education system to a virtual standstill, with many teachers and professors being sent for “re-education” and this is still having an enormous impact on Chinese development policy.
The last major “revolution” was far more positive, when Dèng Xiaopíng came to power and opened up China to capitalism 30 years ago. The time since has been the longest period of stability the country has enjoyed in at least 150 years.

Is that Swan Black?
Education & the new leaders – The Cultural Revolution is the pivotal event in recent Chinese history. Economically, a major transition the country is going through as a result of the Cultural Revolution is replacing that generation’s relatively uneducated workforce with the “post-revs”. All else aside, this should deliver a significant move in productivity.
Politically, the next group scheduled to assume leadership of China beginning in 2012 will include the first of the post-Cultural Revolution generation to receive what would be considered a modern education.

It’s an open question as to what direction they will take the country. As the first computer generation, will they be open to a more liberal policy on internet access, or having never experienced the ravages of war, will they be less adverse to military adventures? Japan, Notwithstanding the enormous recent investments Japan has made, nor official denials, the Chinese neither like nor trust Japan. The memories of the atrocities of the Sino-Japanese War have not diminished. On my recent visit I saw frequent references to and recounting of Japan’s brutality in China. A military conflict between the nations within the next 15 years is a real (if small) possibility.

China’s bubble All protestations to the contrary, I believe that China is in the midst of a housing bubble approaching the levels of those in the U.S.pre-2008. Currently, there are NO property taxes in China. Given the limited number of available investment options, this has resulted in a large number of housing units being built and left vacant. I’ve heard estimates for different cities ranging from 30%-55%. There has been discussion recently of introducing a property tax.

It makes a lot of sense to do so as it would take a bit of air out of the “bubble” in prices and generate some revenue for hard-pressed municipalities who have to supply services, but many of the developers are government owned, carry a large inventory of unsold units, and have a substantial interest in stalling this idea for as long as possible. If a property tax comes about it will be quite low initially but the threat of escalation could take a lot of new construction out of the equation. This could seriously impact the commodities markets.

“A disaster for the world” Premier Wen Jiabao said Wednesday (Oct.6) that a rapid shift in the value of the yuan would be “a disaster for the world” I wouldn’t argue that the RMB isn’t over valued, but given that it’s pretty much the only major economy that’s reasonably stable at the moment, this is probably not the best time to kick the legs out from under their chair. The Chinese economy is really only 30 years old and is still pretty fragile; anything but a gradual move could derail it and the global recovery. “If the yuan isn’t stable, it will bring disaster to China and the world,” the Premier warned. I don’t think he’s too far off the mark.
China’s “Great Depression”? Something I’ve been thinking about a lot lately and that is admittedly pretty far off the map, is the possibility of a “Black Swan” agriculture event in China.

In 2008 I often countered the contention that the U.S. was then headed for another “Great Depression” by pointing out that in 1930 20% of the U.S. work force were farm workers (2% today) and that the “Dust Bowl” drought of the ‘30’s generated a 15%+ unemployment rate all by itself. This on the heels of the 1929 economic crash, created the “Great Depression”; a true “Black Swan”event. Official numbers suggest that farming in China still accounts for 800 million (61%) of it’s 1.3 billion people. Imagine for a moment the chain of events that might follow a repeat of the 1958-1960 drought.

For anyone interested in a daily update on the view from Beijing, there is an English language version of CCTV


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Which Came First, God or the Government?

From guest blogger Keith Schaefer at Oil and Gas Investment Bulletins.....

CEO Tom MacNeill likes to throw that line out to investors as he explains the opportunity at 49 North Resources Inc. (FNR-TSX). 49 North is a specialized venture capital company that is quickly morphing into a fast growing oil producer, with a twist. It’s focused solely on Saskatchewan. The map that illustrates his point shows a stark contrast between Alberta and Saskatchewan. In Alberta, the map has an abundance of oil and gas properties being developed. Moving east across the border in Saskatchewan is like falling off a cliff; there is a dramatic and immediate drop off in the amount of activity in oil and gas.

The productive oil and gas geology doesn’t stop on a dime like that, says MacNeill. He sees huge opportunity in that map. His theory is that 40 years of socialist governments in Saskatchewan have slowed the development of the province’s energy resources, but the new business friendly government of Premier Brad Wall has created a huge wealth of opportunity for energy entrepreneurs like himself. “This is early days (in resource development) in Saskatchewan. The only thing that’s held us up in Saskatchewan is politics. We are at Year 1 in a 50 year process. We have 50 years of upside,” he gushes.

“Use Alberta as an analogue,” he adds, noting that Saskatchewan already has more conventional oil production than Alberta. “We do 500,000 bopd of conventional production. Alberta production peaked in 1983, 40 years after (the original) Leduc #1 (well). We are 40-50 years away from Peak Oil (in Saskatchewan).” 49 North has a suite of mining and oil and gas assets, but has recently been increasing its energy weighting. As is typical of these public venture capital companies, it trades at a 40% discount to its Net Asset Value.

MacNeill has invested directly in several oil and gas land packages, and has production net to 49 North of 80 bopd now, but hopes to have an exit rate of 1000 bopd from its 10 net section land package that produces from the Viking formation “This is not exploration in the Viking. We can do 16 wells per section and we have 10 sections.” 49 North had 100% success on the five wells it drilled last quarter. MacNeill joint ventures or buys out many small operators, and helps them get big fast. “We have so many opportunities, we could make swiss cheese out of this province” he says. “We’ve done a lot of geophysical work in this province. We have a lot of proprietary information from mineral exploration work we’ve done in our mining assets, and there are great synergies there (for oil and gas).”


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