Increased pipeline capacity leads to increased prices
Calima acquires $85 million of pipelines
Pipelines Pipelines Pipelines (Again?)
Regular readers (?) of the Calima Newsletter will probably be experiencing “Headline Deja-Vu” as we repeat the same headline we used in December. We don’t apologise for our lack of imagination because we just love pipelines. Spectacular production growth in western Canada and the Montney in particular has not been matched by growth in pipeline capacity leading to congestion and a great deal of pain for Canadian producers who have had to sell product at a discount. It has been estimated that the Canadian economy loses C$20 billion per year due to lack of pipeline capacity. This was made more painful for gas producers in western Canada last year with constraints on TC Energy’s NGTL system, which moves about 80% of the gas supply in the region causing even more congestion than usual. Most of the constraints on the NGTL network were lifted in late 2019 when T-South returned to its full capacity of around 1.7 Bcf/d following a rupture in the pipeline late in 2018. Earlier this month the North Montney Mainline came on stream. With a capacity to flow 2bcf/d this provides a new outlet for gas from northeast BC and is responsible for the narrowing of the discount for gas priced at Station 2 which is the closest pricing point to Calima.
While Henry Hub prices have slid over the course of the past year, AECO and Station 2 have strengthened alongside winter demand and the forward market is indicating reasonable differentials to Henry Hub pricing. On a relative basis, Canadian gas producers have seen an improvement in operating conditions compared to their US counterparts.
There is also good pipeline news for the heavy oil producers with the Trans Mountain expansion currently under construction and Enbridge planning to add ~100 MB/d this year through an expansion of the Express system and optimization on the Mainline. Why do we care about those pipelines? The heavy oil producers use gas to provide thermal energy (lots of it) and they have an insatiable demand for condensate.
It’s all about the pipelines. Thanks to the introduction of new pipeline capacity long-term gas price predictions (Figure 1) have improved considerably through 2H 2019. Calima regards C$2.00 Gj as a critical threshold marking a positive inflection point for project economics so improvement in futures pricing is welcome news indeed. Condensate and natural gas liquid (NGL) prices have recovered strongly through 2019 (Figure 2). Continued demand for condensate from heavy oil producers has kept pricing linked to WTI. NGL’s have benefited from increased demand from the Ridley Point export terminal and an increase in rail loading capacity.
With all this positivity coming from pipelines we are delighted to be able to add our own bit of pipeline news to the Newsletter.
Tommy Lakes Transaction
Calima has completed the purchase of a set of strategic pipeline infrastructure assets (Figure 3). With a replacement value of A$85 million and a purchase cost of A$825,000 this transaction delivers a very cost-effective way for Calima to secure access to all the major growth markets for gas, condensate and NGL’s. Cost efficiency is further enhanced by savings in time over a new project which would require planning and regulatory approval and the re-use of existing facilities results in a reduced environmental impact
The Tommy Lakes facilities are in good working order with capacity to handle up to 50 mmscf/d of gas and 2,500 bbl/d of associated condensate and NGL’s. The pipelines are connected to the NorthRiver pipeline system which gives access to the major export routes; NGTL/AECO, Alliance and T-North/Station 2.
The Company has already secured approval to construct production facilities and the tie-in pipeline to link the Pad A well site to the Tommy Lakes facilities, so this transaction creates a development ready project.
Calima does not intend to undertake further development work until a Final Investment Decision (“FID”) has been taken. The FID will be subject to securing funding through either the introduction of a joint venture partner and/or project financing facilities being arranged on the back of sustained rising gas prices.
Please click on the links below to the Tommy Lakes ASX announcement and the accompanying Investor Presentation.
Calima’s strategy from inception was to prove up a world class Tier One resource and then seek the optimal path to return value to shareholders. We have certainly achieved the first part of our strategy having proved up a significant resource but with Canadian E&P equity and M&A markets at 20-year lows it has been extremely challenging to follow through with the second part of the plan.
The Calima Lands are now development ready and we are encouraged by overall improvement in energy market conditions across western Canada. Management will be working with their Canadian advisory team to find investment partners for the Calima Lands and to explore creative ways to ensure Calima is able to adapt to the opportunities ahead. In the meantime, further cost-savings measures are being implemented to reduce overheads and preserve working capital.
The Company is presenting at the Kalkine Media Sydney Investor Conference on Thursday February 27th at 10.40 am at Karstens, Level 1, 111 Harrington Street, Sydney.
Management have some availability for meetings on Thursday afternoon in Sydney and in Melbourne on Friday.