EY - Oil exploration rig in wetland

The emergence of Canadian gas divestments

Challenges and success factors

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Over the last two years, we’ve seen a marked increase in the number of gas divestments taking place in Canada’s oil and gas sector. A number of forces are driving companies to shed assets and rethink their business strategies and portfolio management approach.

Driving these decisions are uncertain natural gas prices, sustained high oil prices, an increase in North American gas production, reduced gas demand from the US, and market access challenges.

Figure A
EY - Henry Hub natural gas price

The majority of analysts agree that North American natural gas prices will continue to remain flat ver the next several years. Henry Hub natural gas prices have hovered around $4/mmbtu — with the exception of an increase during January–March due to cold weather across North America. The forward curve for AECO — the Alberta gas trading benchmark — for gas delivered within Alberta remains in the $3.50–$4.00 range with no real signifiant gains even in the high price scenario.

The massive gas resource base driven mainly by the shale gas revolution unfolding in North America is in part responsible for creating this downward pressure on gas prices. Increased well productivity in major plays across the continent is contributing to abundant gas supplies across North America. Marcellus, Horn River, Montenay and Utica, to name a few, are expected to grow to 25% of North American supply.

Divestment deals are a balancing act between competing buyer and seller demands. Buyers and sellers must agree on common goals and align and understand each other’s motivations to ensure success.

EY - Common goals of buyers and sellers

Summary points

  1. North American natural gas supply is expected to grow over the next 20 years with the emergence of unconventional gas plays creating pricing pressures and less US demand for Canadian gas.
  2. Canadian producers face tough decisions around whether to produce for less, squeeze more capital and operating costs out of their systems, sell assets, adopt a wait-and-see approach while trying to maintain licenses, focus on liquids-rich gas, or stop producing.
  3. Many companies are rebalancing their portfolios by divesting off natural gas and focusing on a more oil- weighted production mix.
  4. Divestment success for both the buyer and the seller depends on four critical dimensions: deal strategy, cost management, speed and risk mitigation.
  5. Companies must ensure they understand the people, process, system, asset and third-party obligation components of a transaction to ensure a smooth transition and a phased approach.

EY - Henry Hub natural gas price×