Despite feeble natural gas prices and concerns about federal energy policies, oil and gas producers in the country are expected to nudge up their spending plans in 2024.
However, there are signs some companies are starting to prune capital expenditures on natural gas as prices sag in North America, and look to shift some dollars toward oil-related activities.
“I do expect to see more discussion and probably concrete planning to trim gas-directed capital spending,” Martin King, RBN Energy’s managing director of North America energy market analysis, said Tuesday.
“There’s definitely some more downside to come on prices, and industry will play it very cautiously.”
On Tuesday, the Canadian Association of Petroleum Producers (CAPP) forecast industry capital spending levels will climb by four per cent this year from 2023 levels to hit $40.6 billion.
The association noted two export-related projects — the Trans Mountain expansion and LNG Canada — are providing a tailwind this year that should support more spending.
“Producers are remaining disciplined. They are expecting cap-ex to remain relatively stable through 2024,” CAPP president Lisa Baiton said in an interview.
“The completion of Trans Mountain extension is a big win for the industry . . . Oil production is at record levels in Canada in anticipation of that project’s completion.”
The startup of the Shell-led LNG Canada project — the country’s first liquefied natural gas export facility — is also expected to occur sometime within the next year, which will spur some new gas drilling, she added.
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Capital spending in the oilsands forecast at $13.3 billion, flat from last year’s figures but up sharply from $7 billion in 2020.
There are several risk factors to watch this year, including the effect of the incoming federal emissions cap on the sector, she said, and the ongoing volatility of energy markets.
Crude oil prices have remained relatively strong through the first two months of the year. On Tuesday, West Texas Intermediate (WTI) crude increased $1.29 to close at US$78.87 a barrel.
However, natural gas markets have been in a funk, with benchmark AECO gas prices in Alberta sitting at US$1.36 per thousand cubic feet on Monday.
South of the border, U.S. gas prices closed at US$1.81 per million British thermal units on Tuesday, up six cents. As Reuters noted last week, benchmark U.S. gas prices fell to their lowest point earlier this month — on an inflation-adjusted basis — in more than three decades.
King said warmer-than-average winter weather across much of North America, rising production over the past year and high levels of gas in storage are taking a toll on the market. Natural gas storage levels in Alberta are 45 per cent above the five-year average, he noted.
“Gas is cheap, cheap, cheap,” he said.
“My view is we will hit the bottom for AECO and Henry Hub pricing probably in late March through the first part of April, and then we’ll see some consolidation and a slow rebuild in prices.”
Faced with weak prices, some gas producers in Canada and the U.S. are adjusting their plans.
Kelt Exploration said last week it will reduce its 2024 capital expenditure program by seven per cent to $325 million.
The Calgary-based producer lowered its forecasted average U.S. gas price outlook by 26 per cent, and its Alberta AECO gas price by 30 per cent to C$2.20 per gigajoule.
The company said warmer winter weather due to the El Nino weather pattern caused gas prices to weaken, which led to some capital spending being deferred until 2025.
The gas market will likely face “tough slogging for the summer and things should start to look up again in the fall,” Kelt’s chief financial officer Sadiq Lalani said Tuesday.
“Gas prices will make a recovery, but it won’t be until probably late fall, early next winter. So, drilling those gas wells this summer and bringing on all your flush production at a low gas price didn’t really make any sense.”
Last week, intermediate-sized producer Whitecap Resources said its capital budget this year will be $100 million lower than was initially expected, and is now forecast to be between $900 million and $1.1 billion.
Whitecap has the ability “to be able to swing capital between natural gas and oil,” company CEO Grant Fagerheim said on a conference call.
“We’ll make the evaluations in the back half of the year if there’s a need to shift any other capital.”
U.S. gas producers have also responded to lower prices. Chesapeake Energy announced last week it will reduce its capital expenditures by about 20 per cent to US$1.3 billion. Texas-based Comstock Resources said earlier this month it would suspend its quarterly dividend in response to weaker gas prices.
“Gas producers are feeling pressure to penny-pinch,” said analyst Patrick O’Rourke of ATB Capital Markets.
Yet, winter drilling activity in Western Canada remains robust, as gas producers are “pumping the brakes a little bit,” but the Trans Mountain expansion will need to be filled, said Ensign Energy Services president Bob Geddes.
The company, which operates on both sides of the border, has 55 drilling rigs running in Canada this week.
“You’re going to see the back half of ’24 strengthen, both in the U.S. and in Canada, especially on the oil side,” he said.
“It’s going to be similar to ’23.”
Chris Varcoe is a Calgary Herald columnist.
cvarcoe@postmedia.com
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