The Liberal government announced plans to inject $115.6 million into the province’s northeast gas sector last week just days after a Calgary-based investment dealer slashed its stance on the commodity.
The money will come from the province’s Infrastructure Royalty Credit program and help 16 companies build 21 new roads and pipelines in B.C.’s red-hot shale gas sector.
In an interview with Business in Vancouver, Energy, Mines and Petroleum Resources Minister Bill Bennett said the royalty program supports a sector that saw $6 billion in investment activity last year.
“The opportunity for us is to keep the industry growing, keep them looking for gas and producing gas and paying royalties because, frankly, with the condition of the forest industry, the world economy … this is one of the few bright spots,” Bennett said. “It’s going to get really tough if something happens to the oil and gas industry.”
But some investors don’t share the minister’s optimistic view. On August 30, Calgary’s First Energy Capital Corp. took a bearish stance on natural gas.
The investment dealer cut its average price on the benchmark Nymex market to US$4.63 per million British thermal units (mmbtu) for the remainder of 2010. That’s $0.37 lower than was originally forecast, and First Energy also decreased its price target for 2011 by US$1 to US$4.75.
“We are promoting avoidance of the North American natural gas investment space, seeing robust supply and high storage levels until well into 2012,” First Energy said in a report.
The investment dealer likened the situation to a “supply dragon” that could be slain only with a sword that can keep prices low enough for long enough to “tilt the balance of the market.”
That news came after gas prices dropped nearly 25% in August to $3.70 per mmbtu on August 27.
At press time, gas was sitting at $3.74 per mmbtu.
“We’ve been quite bearish on natural gas for the past two years, and are still quite negative on it due to the oversupply of natural gas … principally driven by what’s going on the United States,” said Randy Ollenberger, an analyst with BMO Capital Markets.
The discovery and production of massive shale gas basins in the eastern U.S. and Texas are largely responsible for the oversupply.
Despite the recent clamour to exploit B.C.’s gas basins, Ollenberger said they’re too small and too far from target markets in the eastern half of the continent to affect the current oversupply. In other words, B.C.’s gas sector is at the mercy of the U.S. shale gas scene.
“Increasing production … by a couple hundred million cubic feet or half a billion cubic feet per day in British Columbia is a drop in the bucket,” Ollenberger said.
Calgary-based EnCana Corp. (TSX:ECA), a major player in B.C.’s gas scene, doesn’t think oversupply will hurt the company’s B.C. operations.
Spokesman Alan Boras said 55% of the company’s 2010 production is hedged at a sale price above $6 per mmbtu, and similar risk measures are in place for 2011 and 2012.
Long-term supply glut or not, Bennett said the province will continue to work with industry to build B.C.’s gas sector. Said Bennett: “I agree that certainly the price of gas is going to be depressed with all of the potential finds coming on like Pennsylvania and even New York … but I think our job as a provincial government is to make sure we’re seen as a competitive place to do business and invest.”