Management Discussion and Analysis
OPERATING ENVIRONMENT SaskEnergy monitors a number of important factors that could influence financial performance. Global Energy Uncertainty
Another quarter into the global pandemic and the energy complex continued to look towards higher energy demand post-pandemic. While most commodities saw some level of price stabilization this quarter, oil prices remained above their pre-pandemic highs and moved up again to levels not seen since the price crash of 2014. Within the energy complex, no commodity saw price volatility like that in the global natural gas market. European and Asian benchmark prices (TTF and JKM respectively) quadrupled since the beginning of the summer storage-injection season. Global supply was impacted by lower receipts out of Norway, Russia, and the Gulf Coast. Global demand was driven by a push to recover below average storage levels and the need for electrical generation in the face of low hydro (North America) and low wind generation (North Sea). Underdeveloped base-load electric generation in Europe even resulted in a surge in coal prices as generation facilities switched back to coal. The North American gas market has become more connected to the global market due to growth to-date (and underway) in export capacity for liquefied natural gas (LNG). U.S. LNG export capacity is near 10 per cent of local production and Canadian LNG capacity should near that same ratio when BC’s LNG Canada facility comes on-line later this decade. In the meantime, facility expansions in Louisiana will help more Canadian gas reach the Gulf Coast for export by the end of 2022. The current limit to LNG liquefaction and transport capacity does isolate North American gas prices from the global extremes, but the primary hub for natural gas price in North America (Henry Hub) is still seeing prices up 100 per cent since April and daily price swings of over 10 per cent occurred over the last few days of the quarter – prices end the quarter at high levels rarely seen since the start of the shale gas revolution ten years ago. Prices in Western Canada were further isolated from high levels (though not volatility) due to an active maintenance season on TC Energy’s NGTL system. This maintenance activity resulted in limitations to export capacity out of Alberta – resulting in (relatively) low prices at AECO upstream of the maintenance bottlenecks. Besides a one week period in August where firm transportation was partially curtailed, SaskEnergy and its customers were still able to source gas upstream of the bottleneck due to a portfolio of firm transportation contracts. Saskatchewan Natural Gas The prior fiscal year ended with lower expectations for gas demand driven by customer de-contracting and lower utilization of remaining contracts. With the economy continuing to recover and an improved outlook for agri-business development, forecasted demand has now stabilized for the next few years. Rising energy prices do present a risk for energy-intensive industries. Local supply continues to trend toward increased dependence on associated gas, 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 $3.41 per GJ throughout the quarter compared to $2.12 per GJ the year prior — the downward pressure of maintenance being overpowered by high prices downstream. The end of the quarter again saw extreme volatility with a range of $0.75 to $4.95 in the span of only four days. 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 $0.27 per GJ premium compared to flat the year prior. The differential had found relative stability until pipeline maintenance dislocated prices through the latter part of the quarter. Looking forward, winter prices remain elevated as concerns for global storage supplies (particularly in the event of a cold winter) outweigh the relatively high local storage levels.
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