Markets seem to have pre-empted the Yukon legislature’s fracking committee, which has until next Monday to share the results of its 18-month study of the benefits and risks of fracking.
Markets often seem to move faster than government and, in this case, low oil and gas prices have forced many players to slash investment budgets. There may already be a de facto moratorium on fracking in the Yukon, at least until some time in the future when energy markets change direction again.
Early stage projects on new frontiers, which would describe Yukon gas, are often the first to be red-lighted in corporate boardrooms in Houston and Calgary. The Financial Post last week published a long list of companies that are cutting spending on gas in Western Canada, including Questerre, Encana, Tourmeline, ARC and Bonavista. Many of these announced hundreds of millions of dollars of cuts in exploration and development. Cuts of 30 per cent or more are happening.
A look at gas prices suggests why. Alberta’s AECO C hub prices declined pretty steadily in 2013 and are now not far above $2 per unit. This is at the lower end of the range gas has traded in for the last five years, although gas spiked under $2 briefly in 2011 and 2012.
With oil prices also down dramatically since last summer, CEOs are battening down the hatches. This is a time to conserve cash so your company can survive the possibility of even lower prices. No one wants to become one of those energy companies having to sell good assets at a distressed price to a competitor just because they ran out of cash during a downturn.
So with oil prices extremely volatile, AECO C hub gas prices headed down, and no one really knowing what is going to happen next, it would take a brave CEO to stand up in front of investors and tell them about his or her plans to invest heavily in frontier assets in the Yukon.
So where does this leave Yukon gas companies? EFLO Energy owns assets in the Kotaneelee field in the extreme southeast of the Yukon. The company is hoping to restart and expand old fields that produced for many years, and which have a processing plant and pipeline connection to Fort Nelson. EFLO says their share of the fields’ gas potential is up to 7 trillion cubic feet (TCF) in shale gas, which often requires fracking to extract, and with only a bit less than 1 TCF in conventional gas.
If the economics of their fields are good enough, they could conceivably start production of fracked or non-fracked gas and feed it into the Fort Nelson grid. However, their share price suggests a different story. The Kotaneelee field is the company’s main asset, so its share price gives a strong hint about its prospects. EFLO shares were over $4 in 2011. By May 2013, as fracking became more controversial in the Yukon and the Legislature’s committee was set up, EFLO had fallen to around $2. Last week, EFLO traded as low as 11 cents. It seems the markets aren’t expecting EFLO to go into production any time soon.
Northern Cross, which has both oil and gas interests north of Dawson, is a different story. People used to say that the lack of pipeline infrastructure to get northern Yukon gas to market was a disadvantage for Northern Cross. Now, with prices so low Outside, this may be a blessing. If they can find and produce cheap gas for either Yukon Energy or a new mine, their fields could have a shipping-cost advantage over gas shipped from Alberta or B.C.
Northern Cross’s latest community presentation says their immediate focus is conventional oil and gas. They also noted in their presentation to the fracking committee that the rocks around Eagle Plains may be suitable for fracking. It’s hard to tell how much an official fracking moratorium would hurt Northern Cross. Perhaps they could focus on conventional resources and be fine. Or maybe a fracking moratorium would hinder them in terms of using the most cost-effective techniques or accessing specific resources.
So we shall see what the Yukon legislature’s fracking committee comes up with. They have three options at a high level: (a) allow fracking to proceed as long as it follows our existing assessment and regulatory processes, perhaps suggesting some way we can leverage the experience of B.C., Alberta and Saskatchewan in sensibly regulating the practice; (b) ban it, as some states and provinces have done; or (c) put a moratorium on it for more study.
A moratorium seems like most politically expedient path with an election coming up. EFLO, which as noted above has the majority of its potential gas in unconventional resources, would be the main victim.
The key thing is what kind of moratorium the committee chooses. It could be just a couple of years, with a list of specific risks and issues that need to be studied as well as recommendations for the government on what kind of resources to put behind the effort. Or it could be a long-term moratorium, which might look more like a de facto ban. Under this scenario companies would limit their investment in exploration in the Yukon even when energy prices recover.
In the meantime, watch that AECO C gas price to see how likely it would be for anyone to want to invest in Yukon gas even if fracking were allowed.
Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. You can followm him on Channel 9’s Yukonomist show or Twitter @hallidaykeith