The AJM price forecast.
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Comments on the December 31, 2009 Price Forecast
“It was the best of times, it was the worst of times.”
- Charles Dickens
Oil and Gas Prices – “a tale of two commodities”
As we move into 2010, there continues to be a divergence of crude oil and natural gas pricing in the Canadian energy industry. While both of these commodities are still oversupplied, natural gas pricing is feeling the impact more so than crude oil. Crude oil pricing seems to have stabilized in the mid CDN$70 (Edmonton Posted), while natural gas hovers around the CDN$4.50/mcf mark (AECO). This equates to a 16:1 oil to gas ratio compared to the prior five year average ratio of 10:1.
Why the disparity in prices? To borrow from Dickens, it’s a “tale of two commodities.” The anticipation of an ongoing world economic recovery coupled with the unyielding growth of China, are bringing stability to the crude oil futures market. United States demand is also slowly recovering, which is a positive. Theories on peak oil production having occurred somewhere between the years 2005 to 2008 continue to influence the long term futures crude oil price.
It is worth noting that if the world has truly reached its peak oil production and alternative energy sources are not capable of meeting the growing demand, then unconventional oil opportunities - like the Canadian oil sands - are going to take more of the spotlight. This will put Alberta in good standing for future growth, especially if access to the expanded Asian markets can be developed from the Canadian West Coast. Enbridge is scheduled to present their Northern Gateway Pipeline proposal to the National Energy Board in early 2010 and, if it goes forward, a new world of opportunities will appear.
While the oil story is currently one of limited supply and growing demand, the natural gas story is quite different. Natural gas, which two years ago in North America was identified as declining in supply, has already ‘benefitted’ from unconventional sources of natural gas reserves. Thanks to new technologies, North America now appears to have an abundant supply of natural gas, and this has had a dramatic effect on the futures price of natural gas. Unfortunately for Alberta’s natural gas industry, the new technologies are facilitating opportunities in areas outside our borders; areas that provide an optimal return on investment. Considering the competition of US shale gas plays and LNG imports to the US, Alberta’s government needs to retool its royalty structure for natural gas to make the province a viable place to invest in if there is any hope to return to the prosperity of past years.
The Government of British Columba, which has been much more proactive in promoting the natural gas industry, must continue to look to the future. The long term outlook for significant natural gas volumes from the Horn River natural gas play in north eastern BC will only materialize if a new LNG export facility is developed on the West Coast to access Asian markets.
The western Canadian oil and natural gas industries are on the cusp of change as we enter 2010. Oil prices will continue to grow as demand increases and production declines on the world stage. AJM Petroleum Consultants has not changed its long term projection of US$100.00/bbl (WTI) over the previous two years of forecasts. The prior September 30, 2009 AJM forecast had WTI oil at US$100.00/bbl in 2016. The November futures average for WTI in 2016 was just under US$96.00/bbl with 2018 at the US$100.00/bbl mark. Unless there are significant changes on the demand side of the natural gas market (such as replacing coal for electrical power generation, natural gas vehicles, or swing energy for alternative forms of energy), then the natural gas prices seen today will not change in the years to come. Arguments exist that the US will see significant natural gas production declines due to the reduced gas well drilling over the last year, but production levels to date are not reflecting this reality. The futures market does show price increases to the US$8.00/Mcf range by 2019 which reflect the concept of the need for more volumes into the future.
Gone are the days of cheap petroleum exploration and development opportunities. Marketing our commodities will force us to look in at world-wide markets rather than just focusing on North America, specifically the United States. As we move into the next decade and beyond, it will truly be a tale of two commodities.
Ralph Glass
Vice President Operations