SaskEnergy First Quarter Report - June 30, 2020

INDUSTRY OVERVIEW

SaskEnergy monitors a number of important factors that could influence financial performance.

Energy Complex Volatility

The prior year ended with the entire global energy complex in a state of uncertainty. Pandemic-related demand destruction combined with a geo-political supply glut had resulted in crude oil prices falling by over 60 per cent. Since that time, oil prices continued to fall with WTI hitting unprecedented negative values; yet oil ultimately finished the quarter up over 40 per cent. With producers significantly reducing capital spending and consumers facing an unknown period of reduced demand, pipeline companies and processors continue to face uncertainty upstream and downstream. With global storage levels and US production at all-time highs, the fall in natural gas prices preceded the broader global slow down. The fall in oil prices may result in higher natural gas prices as the gas associated with oil production may come off the market if oil producers shut-in production. Conversely, reduced gas demand from oil producers could cause a decline in gas prices. Ironically, all of the large factors (production, demand, and storage) have balanced out to leave Alberta-based gas prices relatively stable over the first six months of 2020.

Natural Gas Prices

The price of natural gas is set in the open market and influenced by a number of factors including production, demand, natural gas storage levels, take-away capacity, and economic conditions. Given the high demand for natural gas to heat homes and businesses during the cold winter months, and the demand for natural gas to produce electricity for air conditioning during the summer months, weather typically has a large impact on prices in the near term. Alberta (AECO) and Saskatchewan (TEP) have seen less volatility in the last three quarters compared to years prior. Alberta pipeline maintenance and infrastructure issues have reduced in frequency and severity since October 2019 when NGTL enacted their Temporary Service Protocol (TSP) policy change. The price volatility that occurred this quarter can mainly be attributed to a decrease of natural gas supply caused by a rapid downturn in oil prices which caused the shut-in of some oil wells and their associated natural gas. These two factors were also the leading cause of a higher AECO price than previous years. The AECO daily index averaged $1.89 per gigajoule (GJ) throughout the 3 months ended June 30, 2020 compared to $0.99 per GJ the year prior. Traditionally, most natural gas in Saskatchewan (TEP) is priced at a differential to the Alberta (AECO) price. This AECO to TEP differential for the three months ended June 30, 2020 averaged $nil compared to $0.67 for the year prior. The decreased differential can be attributed to the NGTL curtailment policy that has allowed for higher levels of natural gas to flow through its interruptible Eastgate service, along with elevated price levels at AECO.

2020-21 First Quarter Report

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