CALGARY – The Canadian natural gas industry is expected to post its worst collective loss since 2009 this year, a new report from the Conference Board of Canada predicts, the result of both the fall in natural gas prices and the price collapse for related commodities such as propane and butane.
“We do see, potentially, some employment reductions coming in the next year,” Conference Board economist Carlos Murrillo said of the natural gas sector, adding that companies will be looking at all possible methods to cut costs.
In the same way that oil producers have laid off staff or reduced salaries, renegotiated drilling costs with service providers and cut back on other expenses through this year, Murillo said he expects gas producers will follow a similar strategy in 2016. He expects the sector to return to profitability by the end of that year.
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In a report Tuesday, the Conference Board estimated domestic natural gas companies would post an aggregate pre-tax net loss of $1.5 billion this year, making 2015 the least profitable year for the industry since the dramatic collapse in gas prices in 2009.
Natural gas prices haven’t fallen as dramatically in 2015 as they did in 2009, but Murillo said gas producers have become more dependent on the byproducts of natural gas extraction. Those byproducts are a group of commodities called natural gas liquids and they include propane, butane, pentane and condensate — all of which have fallen sharply in value.
The price of propane in the oilfield, for example, has been negative for significant portions of the year. Natural gas producers are extracting so much unwanted propane they need to pay midstream companies to take it away, rather than get paid for the commodity.
Peyto Exploration and Development Corp., a Calgary-based natural gas producer, noted in its third quarter results that the price it received for its NGL liquids had fallen sharply and was “impacted by negative propane prices in the quarter.”
“These negative propane prices are now expected to persist for the remainder of the year and into 2016,” the company said.
“It takes a bite out of the producer’s pocket,” Murillo said, adding he estimates that 30 to 40 per cent of natural gas producers’ revenues are now coming from natural gas liquids.
Natural gas producers are extracting more NGLs now than in the past because the companies have been increasingly working in shale gas formations, which produce more such liquids than conventional gas formations. In the oilpatch, shale formations are frequently called “liquids-rich gas plays.”
“Decreasing revenues in the near term will result in a pullback in investment intentions in the natural gas extraction industry,” the report said. Murillo expects the largest gas-producing companies – such as Encana Corp., Enerplus Corp. and Tourmaline Oil Corp. – to cut their spending by 21 per cent next year.
The country’s largest natural gas producer, Canadian Natural Resources Ltd., tentatively announced that it would spend between $4.5 billion and $5 billion next year, a slight drop from this year’s $5.4 billion in capital spending. CNRL’s spending is spread throughout its portfolio, which also includes significant oil and oilsands production.