Management Discussion and Analysis
OPERATING ENVIRONMENT SaskEnergy monitors a number of important factors that could influence financial performance. Global Energy Uncertainty
After consistent natural gas market price increases through the previous two quarters, the third quarter saw significant price volatility in both European and Asian benchmark gas prices. The quarter ended with over twenty vessels crossing the Atlantic to supply Europe with liquified natural gas (LNG). High energy prices were also responsible for over twenty energy suppliers in the UK discontinuing operations, leaving over 2 million customers with the need to change providers – highlighting the importance of a well-regulated market and a prudent commodity hedging strategy. Global energy demands are being met with increased production and shipping of LNG. Calendar 2021 saw Australia surpass Qatar to become the world’s leader in LNG exports, but limited expansions in these locations will likely relinquish that position to the United States sometime in 2022. Canada is still expected to enter the LNG export market when the LNG Canada Export Facility near Kitimat, BC opens in the mid-2020’s – though the feeder natural gas pipeline project, Coastal GasLink, remains a point of concern with blockades and construction delays throughout the year. LNG Canada’s position on the west coast to serve Asian markets was strengthened in December when Pembina terminated the Jordan Cove LNG project on the Oregon coast. This project would have been supplied by gas from the Western Canadian Sedimentary Basin but had been challenged for years by regulatory issues for both the interconnecting pipeline and the coastal liquefaction facility. High global energy prices on their own, and in concert with already existing supply chain constraints are a contributing factor in recent increases to inflation – in Canada and around the world. Limited LNG export capacity kept North America somewhat isolated from high global energy prices. Prices at Henry Hub, the benchmark for Gulf Coast natural gas, fell by 40 per cent through the quarter as continually rising natural gas demand required for power generation and consistent demand for LNG were not enough to offset strong production and expectations for above normal temperatures in early winter (US only). Energy prices in Western Canada were further isolated from high global levels (though not volatility) due to an active maintenance season on TC Energy’s NGTL system that unexpectedly extended into November. This maintenance activity resulted in limitations to export capacity out of Alberta – resulting in relatively low AECO prices upstream of the maintenance bottlenecks. The quarter ended with firm curtailments out of Alberta due to a compressor facility in that province being impacted by extreme cold weather on Boxing Day. SaskEnergy was able to utilize alternate transport, so customers did not experience curtailments in Saskatchewan. Saskatchewan Natural Gas The prior fiscal year ended with lower expectations for natural gas demand, driven by customer de-contracting and lower utilization of remaining contracts. With the provincial economy continuing to recover and an improved outlook for agri- business development, potash mining, enhanced oil recovery, and power generation, there is greater potential for increased demand over the next few years. Rising energy and carbon prices do present a risk for energy-intensive industries. Local supply continues to trend toward increased dependence on associated gas, with no new natural gas wells in 2021, leaving local supply highly dependent on the volatile global oil market. With higher prices, rig activity in the province has improved, but not enough to expect meaningful gas supply increases. Natural Gas Prices The AECO daily index averaged $4.41 per GJ throughout the quarter compared to $2.50 per GJ the year prior — as the downward pressure of gas line maintenance being overpowered by higher prices downstream and the market concern for cold winter weather. The end of the quarter saw price recovery (though still below October highs) as cold weather settled over the province during the last two weeks of the quarter. Traditionally, most natural gas in Saskatchewan (TEP) is priced at a differential to the AECO price. This AECO to TEP differential for the quarter averaged $0.10 per GJ premium compared to $0.01 per GJ the year prior. The differential had found relative stability after gas line maintenance was complete and may remain more stable as delayed expansion projects in Alberta are finally completed in April 2022.
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