Swimming in natural gas

At a recent presentation to money managers in Canada’s oil and gas heartland, the chief executive of a major Calgary-based energy trust used an interesting choice of words to describe natural gas. He referred to the commodity as a “wasted byproduct.”

The suggestion that natural gas is worthless may be extreme, but it is an indication of the challenge the industry faces. Market experts continue to expect weak prices for natural gas as a surge in unconventional gas discoveries, such as shale plays, pour on to an already-flooded market. Add in unpredictable weather and a slower-than-forecast economic recovery, and the outlook doesn’t get much brighter.

Canadian companies such as EnCana Corp., North America’s largest natural gas producer, are trying to hedge production but investors might take a look at Australian players that are capitalizing on Chinese demand, or global majors such as Exxon Mobil Corp. and Royal Dutch Shell PLC, that are likely to come out ahead in the race to develop low-cost shale projects.

“We’re going into one of those periods where this commodity has everything going against it,” said Norman MacDonald, who manages the Trimark Canadian Resource Fund. “When you couple low-cost gas from the Middle East about to hit the shores of North America with some of these shale plays that have been emerging, it’s kind of a worst-case scenario for the overall supply outlook and supply cost for natural gas.”

While the stabilization of many global economies has sent oil prices higher, demand for natural gas has fallen off a cliff. The recession that closed factories and power plants has driven gas prices to roughly US$4 per MBTU, slightly above a six-year low of US$3.15 reached in April.

National Post