Varcoe: Pure fuel producers react to sagging costs this winter

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The fickle fortunes of pure fuel markets have Canadian petroleum producers bracing for weak costs in the course of the first half of 2024 and a few revising their spending plans.

Benchmark AECO pure fuel costs within the province jumped sharply in the course of the nasty chilly snap and topped US$10 per thousand cubic ft (mcf) earlier this week, earlier than shortly melting again into the $2 vary, in accordance with information from ATB Monetary.

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On Friday, the U.S. benchmark fuel value dipped to US$2.25 per million British thermal items.

It’s a rocky begin to the 12 months, with executives and trade analysts anticipating producers to reply to costs caught within the doldrums.

Earlier this week, pure fuel producer Birchcliff Vitality minimize its annual base dividend in half to 40 cents per frequent share.

The Calgary-based agency additionally introduced it might delay drilling 13 wells deliberate for the primary half of the 12 months till later in 2024, representing about $80 million to $90 million of deliberate spending, mentioned Birchcliff CEO Chris Carlsen.

(The corporate had set its capital finances between $240 million and $260 million.)

Carlsen, who took over the corporate’s helm at first of the 12 months from retiring CEO Jeff Tonken, mentioned the adjustments introduced Wednesday will give the corporate the choice of bringing manufacturing on-line later within the 12 months, when commodity costs ought to be increased.

“That is all within the spirit of defending the steadiness sheet, based mostly on what we see for the ahead commodity costs,” Carlsen mentioned in an interview Friday.

“I can inform you, the trade is their capital applications. It’s not Birchcliff unique. We’re most likely one of many first ones to regulate.”

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For the reason that announcement, Birchcliff’s inventory dropped 14 per cent on the Toronto Inventory Alternate.

Trade analysts anticipate weak costs for fuel via the spring and summer time, however an enchancment later within the 12 months.

ATB is forecasting AECO spot costs will common C$2.75 per mcf this 12 months, whereas benchmark U.S. costs common US$3 per million British thermal items.

The U.S. Vitality Data Administration not too long ago projected spot costs for fuel will common $2.70 per mmBTU, whereas anticipating American fuel manufacturing to develop by about 1.5 billion cubic ft per day.

In the meantime, a brand new report by Morningstar DBRS mentioned the North American fuel market will possible stay weak via early 2024 due to higher-than-average fuel in storage in the USA, at present hovering round 11 per cent above five-year ranges.

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Decreased heating demand is predicted with the anticipation of a return to warmer-than-normal temperatures this winter.

Stock ranges going into the winter had been elevated and costs have been “sluggish,” Victor Vallance, managing director with Morningstar DBRS, mentioned Friday.

“We do see that offer is kind of ample in Western Canada, and definitely as effectively within the U.S.,” Vallance mentioned.

“I feel we’ll see extra corporations curtail spending, fewer corporations direct spending cash towards pure fuel improvement.”

Regardless of the current chilly snap in Canada and the U.S. over the previous two weeks, this winter has largely seen temperatures above regular with the affect of El Nino.

Whereas Birchcliff led the way in which with its plan to shift spending and minimize its dividend, different corporations may also be deferring capital or transferring it to grease developments.

“What they’re doing could be very prudent. In our view, the Canadian fuel market is more likely to be very oversupplied for 2024,” mentioned Dulles Wang of vitality consultancy Wooden Mackenzie.

“It means we could possibly be seeing extra producers doing cuts.”

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A current report by Wooden Mackenzie mentioned that with a surge in Canadian and U.S. fuel manufacturing and storage inventories final 12 months, the North America fuel market is awaiting the arrival of one other wave of LNG export tasks.

Doug Dafoe, CEO of personal fuel producer Ember Sources, famous western Canadian fuel storage ranges are above common for this time of 12 months, which has created pessimism towards what the costs will seem like in the summertime months.

Nevertheless, the startup of the LNG Canada mission — anticipated in 2025 — will improve demand and supply a brand new export outlet for western Canadian fuel. Different LNG developments in Canada are within the works, together with the proposed Ksi Lisims, Cedar LNG and Woodfibre tasks.

As a substitute of progressing its capital program in January and February, Ember has determined to largely transfer its spending from early this 12 months into the fourth quarter.

“We had been all fairly optimistic going into the autumn final 12 months . . . however Mom Nature caught us once more,” Dafoe mentioned.

“Why would you produce your fuel right into a value setting like this?”

That’s why Birchcliff determined to shift spending and drilling into the again half of the 12 months, ready to observe for what occurs with fuel demand — and costs — within the coming months, Carlsen mentioned.

“We’re making an attempt to be sure that we defend ourselves for the draw back . . . We see higher pricing into (the fourth quarter) and into 2025, so it is sensible to deliver these wells on later within the 12 months,” he mentioned.

“We aren’t giving up on winter, however actually while you begin it that heat, folks get fairly pessimistic, fairly shortly.”

Chris Varcoe is a Calgary Herald columnist.

[email protected]

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