Putin’s war boosts Canadian energy prices

B.C. natural gas prices increased sixfold since 2019: Deloitte

Increased exports of LNG from U.S. boosting North American natural gas prices. | Mike Mareen, Shutterstock

Just three years ago, in 2019, the average price for B.C. natural gas was $1.02 per thousand cubic feet (Mcf), according to Deloitte’s 2022 oil, gas and chemicals forecast.

This year it has averaged $6 per Mcf. Going forward, B.C. natural gas prices are expected to remain well above $5 per Mcf for the rest of the decade, according to Deloitte’s latest forecast.

A pandemic, an energy crisis in Europe, and the war in Ukraine, which has resulted in a major shift of oil and natural gas markets, has made predicting energy prices extremely challenging.

In 2020, Deloitte had forecast B.C. natural gas prices would be just $2.75 per Mcf in 2022, rising to $3.05 by 2028, and Alberta’s Western Canadian Select (WCS) would be $49.65 per barrel in 2022 and $61.05 per barrel by 2028.

Deloitte now expects B.C. natural gas prices will be nearly twice as high over the next decade as it had forecast in 2020. Deloitte has also adjusted its crude oil price forecast upwards to an average of $101.64 per barrel for WCS for 2022, and in the $80 per barrel range for the next two years.

“Things are a little better now than they were a quarter ago,” said Andrew Botterill, Deloitte Canada’s National Leader in Oil, Gas and Chemicals. “Supply and demand is a little bit better balanced, there’s a little bit better understanding how Europe is going to be supported through the winter.

“All in all, we’re going to have a really robust energy sector for the coming year as energy prices are relatively high.”

Almost overnight, thanks to the war in Ukraine and sanctions against Russia, Europe has lost about 40% of its natural gas supply. Europeans have been furiously importing liquefied natural gas, a lot of which is coming from the U.S.

Canada’s own natural gas sector is part of a North American system, so the sudden increased demand for American LNG has pushed up natural gas prices North America-wide.

“Canadian companies are benefitting from those higher prices because, as we’re moving a bunch of volumes from natural gas into LNG and moving them off the continent, it’s creating firmer pricing here,” Botterill said.

“Our buoyant natural gas market has been very important for energy security in Europe. We’re benefiting from it both in the U.S. and Canada, but what I think is important to know is that Canada is not benefiting as much.

“The U.S. is getting much better prices. They’re exporting a lot of LNG. They’re benefittng from those LNG facilities that they built years ago, and Canada’s on the outside looking in because we weren’t able to necessarily get all the projects built in time for this.”

In 2019, the price for B.C. natural gas was just $1.02 per Mcf.

“When you look at that dollar price in B.C. back in 2019, we were awash with natural gas and not a lot of demand coming into the market,” Botterill said.

Higher prices going forward are based on increased demand for North American natural gas to supply the LNG export market. Canada’s own LNG exports may help to sustain natural gas prices here somewhat, once LNG Canada begins exporting LNG around 2025, but it’s mainly American LNG exports that will give the biggest boost to North American natural gas prices.

“We’re seeing Europe sign up for LNG volumes,” Botterill said. “We expect Europe to continue to sign up for significant LNG volumes out of North America. I think they’re doing this in the longer term.This is not something to get through this winter. I think they’re looking and saying ‘we’re not sure we’re ever going to buy Russian gas again.'

"We do think that, in the long-term, North America, given it’s trading partnerships, is going to become a significant part of the energy mix through LNG into Europe.”

While domestic demand for natural gas can be expected to fall over the next decade, as homes and buildings move off natural gas for heating to electricity (heat pumps being a likely replacement), that decline in demand may be offset somewhat as provinces like Alberta and Saskatchewan phase out coal power with renewables backstopped by natural gas thermal power plants.

As for Canadian crude oil, Deloitte is now forecasting much stronger prices in the coming decade than it was forecasting three years ago.

Deloitte now predicts prices for WCS to be in the $80 range for the next couple of years, dipping below $80 per barrel, and then rising again to $83 in 2029.

“I think we’re going to see companies delivering into a relatively firm market,” Botterill said.

“In this world of energy security, I think it’s likely to see higher energy prices than we’ve seen in the past because there is absolutely a need and we’ve got a lot of pressures in the system.”

As for the next generation of fuels – hydrogen – the Canadian energy sector needs to start making those investment plans now, or miss the boat, as Canada did with LNG, Botterill warns.

There are investment cycles and windows for large energy projects, whether it’s LNG or hydrogen, and these investments need to be timed right in order to capture market share.

“LNG had a window, and LNG Canada hit it, and nobody else did,” Botterill said.

“We have good cash flows right now. We can afford to make some of these investments to de-risk (future projects). But we have to keep our eye on the ball and make sure we’re not just developing what our portfolio needs next year, but also what we think our portfolio needs in 10 years.”