Tuesday, June 18, 2013

The BC Government may be closer to balanced than most people orginally thought

The price for natural gas in North America is doing better than had been predicted a few months ago.   It has been higher than assumed in the BC budget by enough to make it reasonable to assume the revenues from natural gas will be closer to 2009/10 or 2010/11 levels.    This would seem to indicate that it is probable that the BC government will collect around $350,000,000 in revenues from natural gas which is about $70,000,000 more than assumed in the budget.  

$70 million is not a huge amount but it could be a lot more if the price rises over the rest of this fiscal year but there is no way to be certain if the right events will happen to drive up the prices.  If price does hold for the rest of the year $500,000,000 to $600,000,000 becomes possible, that is an extra $220,000,000 to $320,000,000 more than the budget forecast.  If the prices do hold for the rest of this fiscal year it makes it a lot easier for the BC budget to be balanced.

So why has the price risen this year?  Supply could not meet demand over this winter in North America.  2011/12 was a warm winter and this drove the price to a record low by April 2012.  This last winter was a cold one.   This summer may also see demand outstrip supply if it is hot, two week weather forecasts for hot weather in the US have driven up the price for natural gas.

Will the recent higher price continue?   In the longer term I do not think the price will see much rise at all, but over the next couple months and years it might.

Weather matters - a hot summer and cold winter will drive up the price.   A heavy hurricane season in the Gulf of Mexico would slow down production and drive up the price.

As the price increases there are many wells that have been drilled but are dormant that can come online.     Meanwhile the general level of production in North America continues to increase.

The Mexicans have become consumers of North American natural gas - they are connected to the US pipelines.  In theory Mexico should have more natural gas than they can use, but the lack of infrastructure investment by Pemex means that Mexico can not produce what they need.   If Mexico were to ever privatize  Pemex there would be an oil and gas revolution in North America.

Longer term the ability to development more supply of natural gas in North America is enough to meet all the current demand potential demand that export is the only option.   In the medium term, if more coal fired power plants were to be closed in favour of natural gas fired power plants the demand in North America may keep up with the supply but likely not as fast as is needed.  Long term North America will see low natural gas prices unless there is significant export of natural gas but that only works if there is a high enough price somewhere to justify LNG.

No comments: