Mounting Pressure on Canadian Natural Gas Explorers A Prelude to Canada’s Challenging Economic Times Ahead

Calgary based Canadian Natural Resources has ceased a seven-month effort to find a buyer or partner for a 25% of its Montney Shale gas and oil assets located in British Columbia. The package covered 240,000 acres of a 988,000 acre lease, with contingent resources at 6.7 Tcf. Canada’s National Energy Board estimates that the Montney formation has total original gas in place of 4,500 Tcfe.
Some independent analysts believe that the British Columbia-Alberta border has the potential to be the third-largest recoverable hydrocarbon resource in North America. This would make them bigger than the Marcellus Shale in the northeastern US.
CNR’s inability to reach a deal is a reflection of the shortage of junior companies that would normally seize the chance to acquire assets in the Montney and Duvernay. This is after numerous European and Asian buyers were unwilling to pay an acceptable price for a similar sale by Talisman.
If companies such as CNR and Talisman are unable to attract cash infusions, they may be forced to delay or abandon exploration and development projects. This is already evident as the M&A activity in Alberta’s overall Oil and Gas Sector to the lowest in the past 7 years. There were just 89 transactions with a total value under C $9 Billion.
Although the Government of Canada’s protectionist policies have a role to play in this decline, larger economic forces are at play that have been building and ignored. Besides the massive shale gas exploration and recovery operations in the US, a new challenge to Canadian desire to be a player in the energy sector is coming from Russia.
Canada has long held a desire to export natural gas and oil to China, where it can get better prices and a more stable demand for the foreseeable future. CONOOC and SINOPEC have already unveiled plans to liquefy and export natural gas from British Columbia but this now being threatened by the Power of Siberia gas pipeline.
For nearly a decade, Moscow and Beijing have talked up the advantages of a pipeline to ship the large cache of Russian natural gas into China. But these talks have often resulted in not much happening on the ground. In fact, they have become a bit of a running joke. This time however the conversations are emerging from industry insiders and investment banks.
The pivotal reason is the Chinese mission of cleaning up the air pollution in its major east-coast cities and easing growing public anger over it coal chocked air. Russian natural gas seems to smoothly slide into this urgent need.
If a deal does actually happen, it would free up China from the vagaries of numerous western administrations, including those of Canada, that like to scold it for human rights infractions and greenhouse emission etc. For Russia this could be a healthier strategic balance in Europe. With an alternative market in the East, Russia might be less inclined to be a participant in the energy driven politics of Europe.
The 2,500-mile route of Power of Siberia will be dispersed along 3 or 4 Chinese entry points. The major challenge will be the gas price of $10 or $11 per MMBTU. This is the same price paid by European consumers of Russian natural gas. China, has always insisted on a lower price of close to the $9 per MMBTU. This is the price it pays for its piped gas from Turkmenistan. However, China may be willing to compromise on the price because in the long run, switching power production to natural gas will allow China to reduce its greenhouse emissions and thus allow it to have a stronger negotiating position at least on one front.
In Canada itself, survey’s and studies suggest that the wages for oil-patch workers rose 21% between 2001 and 2008. (http://www.cbc.ca/news/business/oil-patch-salaries-rise-5-times-as-fast-as-rest-of-canada-1.2494418). This was 5 times the pace of growth in other sectors of the economy. This rent seeking, in the absence of skill, has led to a decline in the post-secondary education enrollment in the provinces of Alberta, Saskatchewan and Newfoundland. Hhigh wages have resulted in inflated property prices and infrastructure pressure that cannot be explained by an economic ‘boom’ as described by policy makers, but rather by a bubble that has been in the making for almost a decade. For this spectacle to regress back to the mean, one of two things must happen:
The economy of rest of the country must accelerate with a significant momentum in the next few months to catch up with that of the energy producing provinces.
Or, the energy driven economy of western Canada slow down to allow for normalization.
The first is unlikely to happen; this leaves the second possibility ever more likely and provides further evidence to the potential deceleration of the energy sector and Canadian economy in general.