People have often heard compelling arguments about why it is so important to get oil to tidewater, but they don’t often hear the case for natural gas.
Yet there is a very strong one – in particularly the opportunity to double, or more, the current gas prices. In fact, it’s bigger than that, as the current dysfunction in the domestic gas markets has led to gas producers, at times, giving away their product for nothing, or even paying for it to be taken away.
Jason Skehar grew up on a farm near Theodore and obtained his mechanical engineering degree from the University of Saskatchewan in 1994. These days he’s the president and CEO of Calgary-based Bonavista Energy.
Skehar will be talking in Regina on Sept. 4 at a Saskatchewan Chamber of Commerce luncheon as part of Energy Week. Similar events are happening across the country in early September, with a number of oil and gas CEOs talking about Canada’s role in the global future energy mix. Skehar will also be taking part in a panel later that afternoon with the Petroleum Technology Research Centre.
Founded in 1997, Bonavista Energy is principally a natural gas and oil producer. Skehar started with Bonavista very early on, as a production engineer in 1999. By 2012, he had worked his way up to president and CEO.
The company has roughly 65,000 barrels of oil equivalent per day (boepd) production in west central Alberta (gas), Deep Basin (gas) and East Duvernay (oil). The company is weighed 70/30 gas to oil.
“This event is largely centred around Energy Week,” Skehar said. “The whole purpose of guys like me participating in Energy Week is to continue to bring transparency to the role energy plays in our society, and in our lives as Canadians.
“As we think about market access, having one customer in Canada for our fossil fuel energy, we are experiencing some tremendous discounts for the products we produce, and as a result are going through some very, very challenging times.
“So, when I think of market access, I connect these challenges we’re faced with in Canada, with finding alternative markets or expanded markets associated with the constant growth in demand for energy around the world.
“I think to myself, what an opportunity we would have, as a nation, and all the strengths we have as Canadians to find an efficient way to develop alternative markets, other than the one buyer we have for our product today.”
It’s no coincidence that Bonavista’s current corporate presentation on its website starts off with several pages highlighting the importance of shipping liquified natural gas to markets across the Pacific and to southeast Asia.
Over its 22-year history, Bonavista has cycled in and out of Saskatchewan.
“Today, we probably have the least amount of production in Saskatchewan, relative to any other time in our history. Specific to heavy oil country, our position in northwest Saskatchewan is largely shallow gas. That’s primarily because we ended up selling our significant footprint in primary heavy oil country about six years ago.
“Corporately we don’t produce a lot of oil, and we don’t produce a lot in Saskatchewan.”
“In 2007-2009, we were very active in the Bakken. Like the Lloydminster area, we ended up selling that position 10 years ago. We had, at one time, three or four rigs working in the Estevan area.”
“We felt we could not compete as well as we needed to in those areas. Our land footprint wasn’t significant enough for us to compete at the level we needed to, and secondly, we had some challenges in getting our product to market without having the scale we felt we needed, in both of those areas. At the point in time we decided to divest in those areas.”
They weren’t connected to pipe, and everything was on track.
These days, Bonavista moves most their gas shipped either on the TC Energy mainline to Eastern Canada, or through Northern Border into the midwest region of the U.S.
“In both cases, the gas gets gathered on the NGTL system and leaves out of one of the border connections. That’s what we spend most of our time on, when it comes to market access.
“Clearly, we’ve spent most of the last two years selling our gas at a discount of 50 plus per cent to the equivalent U.S. NYMEX Henry Hub pricing. We can’t seem to simplify our regulatory process and build enough pipeline egress quick enough out of the producing regions of Western Canada, and hence are experience a significant discount for our product.”
One of the key reasons behind the whole concept of the now-defunct Energy East pipeline project was that the TC Energy (formerly TransCanada) mainline to Central and Eastern Canada was running at significantly less than full capacity, and one of those pipes, the largest one at 42 inches, would have been converted to oil service.
Asked if the reason Bonavista was having difficulties was due to lack of pipeline capacity, or the lack of clients in the east due to displacement by gas from the eastern United States, Skehar said, “It’s a little bit of both. Clearly there is a portion of the mainline that is not being utilized, and it’s going to require some capital, and regulatory efficiency to bring it into service.
“Specifically, when you talk of Energy East, that was a very topical discussion for us because not only could that pipeline be used for incremental oil egress for Western Canada to serve markets that, right now, are importing oil on the eastern side of our country, it could also be used to serve incremental natural gas egress. The reason it’s not is largely because there were insufficient contracts on the consumer side to warrant keeping that pipeline operating and delivering incremental gas to the eastern seaboard.”
Skehar is really keen on getting natural gas to the West Coast, liquifying it, and shipping it overseas to foreign markets.
He said, “Let’s look at it from a global perspective. The global LNG market today, as you assess the forecasts in energy demand, you have a number of developing countries that have a significant air quality issue. A number of Asian countries are, today, burning solid fuel like wood and coal to cook food and heat homes. With that fuel source, there is a tremendous amount of health risk. When you look at those countries and their aspirations to clean up their environment and their air quality, those aspirations are driving global growth forecasts in natural gas demand in the order of 40 or 50 per cent in the next 20 years.
“When you think of those countries demanding this much clean fuel, and you connect that to the natural resources that exist in Canada, there’s a tremendous opportunity for Canada to participate in providing those countries in need.
“Clearly, if we could find a way to have our natural gas exported off our shores, be it the West Coast or the East Coast, not only would it be a significant step in the context of our economy, it would clearly have a significant and positive impact on the environment,” he said.
As an example, back in 2010, both the U.S. and Canada began on the same foot, with the potential to provide the rest of the world with a clean and reliable source of energy, natural gas.
“Ten years later, Canada will not be shipping a molecule of gas off our shores as LNG, and our neighbours to the south will be shipping in excess of 10 BCF per day,” he said.
Currently the U.S. is shipping about 6 BCF a day of natural gas, mostly from the Sabine Pass facility near the Louisiana/Texas border. Next year that number will be greater than 10 BCF. “As grateful as we are for LNG Canada to have reached FID (final investment decision) and a pretty strong signal that project is going to go ahead, it’s going to be 2024-2025 before we ship our first molecule of gas out of LNG Canada.”
Bonavista is not signed on to ship out of that project. Skehar noted it is principally three or four very large, integrated companies, and likely they will be the only ones to ship through that facility.
“We’re part of a consortium referred to as Rockies LNG. It’s a consortium of nine producers in Western Canada. These nine companies have allocated in excess of a BCF a day of natural gas production that will feed another LNG facility on the West Coast, provided that we can, in cooperation with our governments and all stakeholders, find a way to get our gas to the West Coast, get a facility built, and get natural gas shipped to the countries in need.
“Geographically, we’re situated well to get that LNG to southeast Asia, to China, some of the countries in desperate need of this energy. These countries only have 10-12 day by ship from our West Coast versus 24 days from the US Gulf Coast.”
Bonavista is not part of the Woodfibre project, either.
“We’re trying to create our own project,” he said, noting that nearly 20 projects have been proposed over the past decade.
“Many of those have been deferred or cancelled due to regulatory, commercial, social and/or political issues. We’re trying to pick up the pieces of one or more of projects so that we can find a way to move forward, where our predecessors have left the projects suspended or abandoned. In many cases, these projects met their fate prior to LNG Canada getting approved, and the landscape has changed since that project has been approved,” Skehar said.
Natural gas prices have dropped so much that, at times, they have experienced “negative pricing,” where not only are they giving away the product for free, but paying someone to take it.
“We’ve had such volatile pricing, largely because our infrastructure is bottlenecked and, outside of our domestic consumption, we have only one buyer for our product. We’ve experienced points in time over the last two years whereby natural gas pricing at AECO was worthless, or as you just pointed out, negative. We’re paying the consumer to take our natural gas away. They’ve fluctuated from that level to $2 a gigajoule, certainly a more normalized price level, in the matter of a week.”
Asked how you stay in business when you’re giving away your product, he said that’s front and centre for many Western Canadian natural gas producers. “Without certainty, and at least some stability – again, this is a free market, so don’t misinterpret my comments – but without some stability, it’s difficult to build a long-term business plan.”
To that end they are hedging their products whenever the opportunity exists and pursue alternative markets outside of the AECO natural gas market. “But at the end of the day, we need to experience some level of price certainty in western Canada to not only stabilize, but grow the business as we look forward.”
Western Canadian natural gas production levels sit around 15 to 16 BCF per day. With LNG Canada and an incremental two to five LNG facilities, there’s a belief Western Canadian natural gas production could grow in excess of 20 BCF per day.
But can they make money at $2 per gigajoule?
“Oh, yes. When you get into the natural gas business, and look at what producers have been able to do with technology and innovation, we’ve significantly reduced the finding, development and operating (costs) of a natural gas molecule over the last five years. We believe that while we’re not as profitable in the natural gas business as we once were, a good, solid $2 natural gas price goes a long way relative to the Canadian prices we’ve been experiencing the last two years.”
What difference on price would having their own LNG export facility make?
“Natural gas is on the emerging as a global commodity,” he said. “Right now, there’s nearly 50 BCF per day, on a boat, in transit, at any given time. That volume is expected to double in the next 15 years. That will make that product a much more global product, whereby the pricing that we see in each region, in Canada and North America, will converge towards a global price.
“Today those prices are at an all-time low because numerous LNG projects have recently been commissioned around the world, selling gas around $5-$6 per MMBTU (one MMBTU = 1.05 gigajoule). A year ago, it was closer to $10-$12 per MMBTU.
“$2.25 for a MMBTU works well for Western Canada, so $2.25 is half of what the global price is today,” Skehar said.
With LNG demand expected to double in 15 years, that’s going to bring the global LNG price up. It may not be the $10-$12 it was, but it will be better than the $5-$6 per MMBTU, and will be a lot better than the current price in Western Canada. It comes down to a more than doubling of the current gas prices.
When it comes to the environment, Article 6 of The Paris Agreement allows countries to receive emissions credits when they are able to supply other countries with cleaner fuel, he noted. The federal government committed to a 30 per cent reduction of Canada’s GHG emissions from 2005 to 2030 under the Paris Agreement.
By 2040, approximately 1,500 megatonnes of carbon dioxide equivalent (MtCO2e) emissions could be eliminated every year if new power plants in China, India and Southeast Asia are fuelled with natural gas instead of coal. To put this in context, Canada generates approximately 700 MtCO2e of GHG emissions each year. Bottom line, exporting natural gas off the West Coast of Canada is a momentous win for Canada’s climate, reputation and economy, according to Skehar.
The nuclear disaster at Fukashima, Japan has led that country to convert much of its energy usage from nuclear towards LNG. India is expanding their infrastructure to handle natural gas and its import.