One of Canada's key energy producers is warning that natural gas prices will continue to sag for a very long time – perhaps as long as a decade.
Gas prices have been depressed for the past few years, amid a surge of supply from newly accessible shale-gas reservoirs that has created a substantial glut. Prices below $4 (U.S.) per million British thermal units (BTUs) are so low that many wells are flirting with losses.
And the bad times may be here for a while.
"We now expect gas prices to be low for the next five to 10 years," Steve Laut, president of Canadian Natural Resources Ltd. , said Thursday, when the company reported third-quarter earnings of $836-million, up 40 per cent from the same period last year, but down 10 per cent from the second quarter.
"We hope we're wrong," Mr. Laut said.
But he pointed to the huge amounts of natural gas that have been discovered with new drilling techniques, such as horizontal wells and underground fracturing. By some estimates, North America now has enough gas to maintain current supplies for a century.
That is an "overwhelming" amount of gas "that can come at relatively low cost. And it doesn't look like the economy is going to drive demand too much higher, in a big way, to make up for that oversupply," Mr. Laut said. CNRL had previously said a recovery could happen as soon two years from now.
The company has a good perspective on the market: It delivers 1.2 billion cubic feet of gas a day, more than 8 per cent of the Canadian total.
The dire outlook comes amid broader industry moves that suggest increasing skepticism about a North American price recovery. Weak gas prices are a boon to consumers, who benefit from lower heating and electrical costs, and to the manufacturing and petro-chemical industries that use gas a major input. But they have caused substantial pain in Alberta, shrivelling an important source of government revenues and wreaking havoc with numerous companies that long depended on gas as their primary product.
Encana Corp., the largest independent producer, has backed away from a five-year plan to double its output, and is selling billions in assets this year to avoid a cash-flow pinch. Industry is also seriously looking at alternative markets. Encana, Apache Corp. and EOG Resources Inc. are months away from a decision to build an LNG terminal on the West Coast that would enable exports to Asia, where prices are substantially stronger. Global giants such as Royal Dutch Shell PLC and Malaysia's Petronas are looking at similar plans.
Talisman Energy Inc., meanwhile, is looking to convert natural gas to petroleum products such as diesel, an expensive plan that depends on gas prices lagging oil far into the future. Low prices, however, will hurt the company's dive into new gas plays, and on Wednesday, chief executive John Manzoni acknowledged a recovery could be some time in coming.
"Maybe we are here or hereabouts for a while," he said. If that happens, the company will "re-examine" some of its strategies, Mr. Manzoni said.
Not everyone is pessimistic, however. An analysis by ARC Financial suggests that natural-gas output is beginning to fall, as companies chase plays that produce more profitable liquids – such as ethane and butane – but less actual gas. Among the 10 largest gas producers, overall output has peaked and is sliding. Even a doubling in prices is unlikely to generate a stampede of new gas wells, since oil will continue to be far more lucrative, said Peter Tertzakian, ARC's chief energy economist.
"We know [the gas]is in the ground but it's not coming out of the ground unless the price is right – and that is when it's as, or more, attractive than the next-best alternative," he said.
At the same time, gas consumption continues to rise. Since 2006, U.S. demand has climbed 11 per cent. In 2011 alone, it rose 2 per cent.
Simple economics suggests increasing demand and declining supply will support better prices, and Mr. Tertzakian believes a turnaround is likely to come sooner than later. He suggests it could happen in 12 to 18 months. "It isn't five to 10 years," he added. "That's for sure."
With files from reporter Carrier Tait