Published On: Sat, May 21st, 2016

Natural Gas Demand Dips as Tar Sands Production Declines

Natural gas prices have been trading under pressure recently, and prices are poised to revisit the recently lows seen near 1.80 in March. Not only has the weather been mild in the U.S. during the Spring months, but wildfires in Alberta near its oil sands operations have led to declining consumption of natural gas, which is used in oil sands mining operations, and all-time lows in Canadian natural gas prices. Additional manufacturing in the U.S. and globally has continued to decline reducing demand for natural gas.

Natural gas drilling rig

Alberta is one of the largest producing regions of oil sands in Canada. The Fort McMurray region experienced the beginning of a wild fire on Sunday May 1, 2016. Although production was less than expected the recent evacuation of employees has led to a serious decline in production. Officials estimate that nearly 90% of the homes remain intact which will allow employees to eventually return to the region. Many analysts believe that nearly 1 million barrels a day of oil from the sands region has been shut in. Reports have also circulated that this reduction in production has led to a significant decline of natural gas in the region. Natural gas is used to operate cogenerations facilities used by producers along with mining operations and upgrading operations. Declines in crude oil production are largely the result of the evacuation of oil workers, rather than direct damage to oil fields.

Current estimates show that the reduction of production in Alberta of oil during the last month has led to a decline in demand for natural gas by 25%. This has led to a decline in prices for Alberta natural gas which has spilled over into benchmark Henry Hub. Prices in Alberta for AECO spot have dropped by more than C$0.50 per mmbtu. With Alberta natural gas experiencing high inventory levels it appears that capacity will be reached some time during the summer of 2016.

The wildfires have moved away from Fort McMurray, and some oil producers in the area have restarted operations, but it will take a while for employees to return to the region. Demand will be linked operational return. At present this appears to be a hiccup on the process, and demand should eventually return to normal. The longer it takes for oil production to return to the region the greater the upward pressure on storage capacity. Shell Canada reported on Tuesday that it had restarted operations after a seven-day closure caused by the fire.

The Canadian Conference Board of Canada released a detailed study on the potential/anticipated economic impact of the fire, however, this was prior to the fire’s change in direction and the assumption that production would be back up and running by month’s end. The initial study indicated that the estimated average loss of oil sands output would be roughly 1.2 million barrels of oil per day for two weeks which translates into $985 million in lost GDP. Many believe that the fire will have potentially a grave effect on Canada’s economy, however, some believe that it is premature to calculate/determine exactly what the fiscal impact on the federal Canadian budget will be.

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