O&G Price Dynamics; Optimism Lies with Calima Energy's Pipeline Capacity
Price of oil & gas (O&G) varies with geopolitical tensions as well as economic growth. The Brent crude oil front-month futures’ price fell from US$11.32/per barrel (b) on 2 January 2020 to US$54.93/b on 6 February 2020. Whereas, the delivery price at Cushing, Oklahoma for West Texas Intermediate (WTI) crude oil decreased from US$61.18/b to US$50.95/b in the same time interval.
Several events contributed to the fluctuation in prices, starting with the rise in September 2019 due to the attack on the Saudi oil processing facility, US-China trade deal and Brexit impact anticipation to mention few.
Price again fell in late-September 2019 due to the Saudi recovery of oil adding to the supply and weak economic information for Europe, Japan and the US supporting sentiments of oversupply in the market. However, the price again started to rise from November onwards due to several factors including the postponement of trade war discussions following the US election and US drone attack on Iran.
Come 2020, the crude oil market, as well as the world economy, witnessed substantial ambiguity over price. The spot Brent crude oil price closed at US$70/b on 6 January 2020, the highest post recovery in November 2019; however, the price fell again due to the de-escalation of tensions between the Middle East and the US and fading concern over disruptions in oil supply.
The plummeting trend further coupled with hotter-than-normal temperatures across most of the northern hemisphere in January 2020 reduced the demand for oil for heating purpose. Moreover, the deadliest Coronavirus hammered the price further. The uncertainty about magnitude and duration of Coronavirus along with travel restrictions have disrupted the O&G demand not only in China but also in other countries.
Canadian O&G Market and Global Uncertainty
Canada produces O&G more than its consumption, and the remaining is exported to the market. In the milieu of which, it is pertinent to mention that recently Finance Minister Bill Morneau said that the crude price plunged by 15% due to lower demand since the virus epidemic in China. The country does not export oil directly to the Asian market but into the saturated market of North America at a lower price due to the limited pipeline capacity and export infrastructure.
Why the Egress Capacity is Constraint in Canadian Market?
Stringent regulation related to water, emissions, tailing management and most importantly, the presence of regulator at both federal and provincial or territorial region has led to the shortage of pipeline capacity in Canada. Provinces have jurisdiction responsible for the regulation of resources, and each province has distinct regulators dealing with labour, safety, environment and transportation.
All the above factors resulted in the delay or even suspension of many pipeline projects, leading to capacity constraint for oil export, thereby causing a decline in Canadian oil & gas price, i.e. US (Henry Hub).
Is there any recent announcement of pipeline capacity?
Yes, recently Australia-based Calima Energy Limited (ASX: CE1) received approval for a pipeline construction project for its asset in Montney Formation- a super-rich liquid window.
The grant to construct the pipeline for up to 1,500 bbls/d of well-head condensate and 50 mmcf/d of wet gas would help in connecting the future Calima wells to the regional sales network, prompting demand soon, and hence the prices recovery is envisaged.
The pipeline would assist the transfer of future production from the Calima Lands to the North River Midstream, providing access to the Canadian and US markets to AECO, Alliance and T-North/Station 2. Besides, the proposed entrance to the Shell/Petronas' LNG Canada Facility and the upcoming Woodside/Chevron LNG Facility at Kitimat, an interconnect between them, is intended in future.
Concerned about Calima Asset? Must Read: Calima Energy's Asset Performance and Future Outlook
Calima Energy owns 100% of the ~64,458 acres of drilling rights in Montney Formation, British Columbia. The Company recently announced its December quarter update and the key highlights apart from pipeline construction are: -
- Approval for a wellsite production facility including basic amenities from electric generation metering to tankage and a control centre.
- Grant of ten years until 2029 on the approved acreage of Calima Lands.
- Sale of Namibia PEL 90 at A$2.9 million along with the bonus of ~ US$10 million, subject to production.
To know more about December quarter update, please read: Calima Energy Releases December Quarter Update; Initiatives in Line with Montney Formation Project
As per EIA, Canada petroleum and other liquids supply is likely to increase by 6.6% from 5.49 million barrels per day in CY2019 to 5.85 million barrels per day in CY2021. The consumption is anticipated to remain the same as CY2019 in CY2021, i.e. 2.52 million barrels per day.
The near-term price of WTI and Brent crude oil is likely to fall in CY2020 and later recover in CY2021 as shown in the figure below. The Henry Hub Spot Price following the same trend as crude oil is expected to be lower in CY2020, i.e. ~ US$2.29/thousand cubic feet than previous year price of US$ 2.66/thousand cubic feet and they seem to be correcting in CY2021 to US$2.62/thousand cubic feet.
The Company is presently focusing on the development of the pipeline project. Its ongoing strategy is to secure the required approvals, permits and authorisations to finalise a Field Development Plan, which extends the basis for a competent reserves statement to be endorsed to potential partners and financiers.
Please click here to know about the performance of CE1 in 2019.
Stock Price Information - The CE1 stock last traded at A$0.005 on 13 February 2020 with a market cap of A$12.93 million.