Canadian Natural Resources Ltd. looks to be renewing its commitment to natural gas. Its timing could prove fortuitous.
The Calgary-based oil and gas company, best known as one of the major players in Alberta's oil sands, last month abandoned its plan to sell its natural-gas assets in the Montney region of British Columbia. Now it's doubling down on natural gas, buying Western Canadian gas assets from Devon Energy Corp. for $3.1-billion.
There's a natural synergy for CNRL with natural gas; its oil sands need plenty of it to fuel their operations. That alone might be ample reason for it to hold significant gas assets – both as a source of supply and a natural hedge against a major cost variable in its oil sands business. The assets CNRL is buying – as well as the Montney properties it is holding on to – are also rich with "liquids" (such as propane and butane), which have been fetching better prices than natural gas and thus improve the economics of gas production.
Still, it's hard to overlook gas's price funk that has dragged on for years now. There have been a lot more companies looking to sell Canadian natural gas assets than buy them in the past couple of years – and, as CNRL discovered in its attempts to unload its Montney properties, the few prospective buyers out there are offering bottom dollar. For producers with significant natural gas exposure, it's been a matter of holding on and hoping for the market to recover.
Well, we may finally be seeing the cusp of that resurgence – and Canadian Natural has taken an early jump on to what could become quite a bandwagon.
Natural gas surged above $6 (U.S.) per million British thermal units Wednesday, to its highest levels since the end of 2008. The price is up 25 per cent in the past week alone. Unquestionably, a harsh winter has been a major factor, as heating demand has eaten into inventories of gas in storage. While the U.S. cumulative count of heating degree days (a calculation of the number of degrees, per day, that the temperature is below 65 Fahrenheit) for the year to date is 13 per cent above last year's count, it's only a modest 4 per cent above the long-term historical norm.
But inventories in U.S. gas storage facilities are at their lowest level in a decade for this time of year – 33 per cent below a year ago and 20 per cent below the 10-year average. And the bigger issue isn't the spike in winter demand, but rather the lack of fresh supplies – and that's what suggests this is much more than just a weather-related rally.
After years of strong growth in natural gas production, thanks primarily to the boom in U.S. share gas, growth has flattened over the past 18 months – and drilling for new wells has fallen off a cliff. The number of drill rigs working in U.S. natural gas fields is less than a quarter of the count in 2008, and only about one-third of the number in 2011. The combination of weak prices, high costs and rapid depletion in many shale gas fields has discouraged gas drilling, with large numbers of rigs being redeployed on more lucrative oil prospects; natural gas drilling has slumped to its lowest level in 20 years.
This suggests that natural gas inventories will have a very hard time bouncing back as high as usual once the winter heating season is done – which, in turn, suggests they may enter next winter understocked, too. With producers increasingly shying away from high-cost shale gas and with many of the older shale plays now on the decline after years of aggressive exploitation, we may be entering a new era of much tighter supplies.
That's unquestionably bullish for prices over the next few years – and for a resurgence in natural gas investment, too. Canadian Natural's $3.1-billion commitment to natural gas may just be the beginning.