Winter is coming — and that could be good news for Alberta's natural gas sector

Amid a tumultuous stretch for Alberta's oil and gas industry, there's hope around the sector that the arrival of winter could bring some stability for natural gas producers.

Analysts say a drop in natural gas production in the United States — resulting in part from a dramatic pull back in American shale oil — may provide a much-needed lift in prices, if a normal winter is around the corner.

It's a situation that could improve companies' cash flow, helping them to pay down debt. It may also provide a window for Canadian gas producers to boost their U.S. exports.

"I think prices will be better, drilling will pick up some and ... natural gas remains an extremely important commodity," said Martin King, a senior analyst with RBN Energy.

"It's stability, hopefully a little bit of upside, but right now stability is good. 'Stability' is the new 'Up.'"

North America's oilpatch has been hit hard by the impact of a slumping economy brought on by a global pandemic. As fuel demand plunged this spring, crude prices tumbled and oil companies scaled back production.

Among the hardest hit were American shale oil wells, which also produce a lot of associated natural gas. It's expected the North American gas market will tighten considerably in the coming months.

At the same time, some expect U.S. exports of liquefied natural gas to places like China to pick back up.

"So you'll have less U.S. production, more U.S. exports, a tighter market, and that'll kind of be the rising tide that lifts all boats — and will pull up Canadian prices as well," said Ian Archer, a director with energy consultancy IHS Markit.

Currently, however, natural gas prices are relatively soft in North America. 

Thomas Kirk-Pearson, a senior associate with energy consultancy Enverus, said there was a significant build in U.S. inventories this summer due to reduced consumption of natural gas related to the impact of COVID-19.

"We're sitting in the shoulder season where you begin to flip from injecting natural gas to withdrawing it from storage at record inventories," Kirk-Pearson said.

"And so that's really what's been causing ... both weak and volatile natural gas prices."

But with the arrival of a normally cold winter — and the anticipated increase in heating demand — it's expected that natural gas prices will improve for producers.

Morgan Kwan, also with Enverus, said the Alberta gas market is set to have a pretty strong winter as well.

"Gas out of Western Canada has been on the decline over the last couple of years and so we're finally at a point now where supply isn't out-balancing demand," she said.

On Wednesday, the Alberta benchmark spot price, known as AECO, traded at $1.55 per gigajoule. Kirk-Pearson said prices in the market are implying an AECO price of $3.34 per Gj in the first quarter of 2021.

RBN Energy's King is expecting the AECO price to average around $3 per Gj over the winter.

At those prices, King anticipates gas-focused producers will play things safe and work within the resources they have. He said there may be a little bit of uptick in drilling, but "probably not a heck of a lot."

"So it won't be any kind of major gangbusters for the sector here," King added. "It's stability. That's the kind of thing that we need right now."

Of course, there are few guarantees in energy markets these days and producers face the risk of something upsetting the anticipated rise in demand, such as a mild winter.

Darren Gee, chief executive of Peyto Exploration and Development, an Alberta-based natural gas producer, said he's feeling cautiously optimistic about the next few months.

"We've obviously survived some fairly terrible gas markets here for the last few years that has really just decimated the natural gas industry in western Canada," he said. 

"So it's not party time yet. But we're cautiously optimistic that we've got some constructive prices on the horizon."