Editor’s note: This is an excerpt from the 2024 Top Operators Report, brought to you by KPMG in Canada & geoLOGIC systems ltd. Download a free copy of the full report here.

Canadian oil and gas operators haven’t sat on their hands waiting for the TMX and LNG Canada startups to capture higher value markets.

Instead, over the last decade they have diversified markets and devised hedging strategies to capture every nickel and dime from production.

Natural gas producers, whether through physical connections or contracts, are delivering to price points across North America chasing higher prices for their product.

“The positive impact on netbacks can be substantial,” said Heather Steinley, Partner, Audit, KPMG in Canada, however, it can have a downside.

“There are risks as an entity may have to contract for egress and markets shift but pipeline commitments remain. The ultimate risk is markets shifting — a position is contracted (physically or financially) and the markets turn.”

“Market optimization can be fickle, and it is hard to find an accurate crystal ball. Robust processes and controls are needed, including a clear understanding with your Board of Directors, to govern and oversee the trading activities and the value at risk.”

Operators will continue to focus on maximizing the value for the various components of the gas stream, said Steinley. However, there continues to be a robust supply of natural gas which hampers the pricing of this molecule.

Some larger operators have signed LNG export deals using U.S. terminals. More Canadian gas is likely to move to international markets using this route, said Steinley.

“If you can move the gas to a market with an enhanced price it will be done at an increasing level,” she said. “Often larger volumes are needed to support these contracts so there is also potential for gas aggregators to have an increasing role.”

Oil producers have also found ways to move product to higher value markets. In 2022, an average of around 130,000 bbls/d of the 590,000 bbls/d shipped to the Gulf Coast by Canadian operators was re-exported to global markets, according to U.S. government data.

In 2023, re-exports averaged around 200,000 bbls/d with peaks of around 300,000 bbls/d as global demand for heavy crude to replace some Russian supply increased.

Most oilsands operators expect to continue re-exporting to provide another option to ship crude, even with the 590,000-bbl/d TMX now operational.

“More tidewater in Canada is great and hopefully it will drive the differential down or at least reduce periods when the differential blows out,” said Steinley. “However, the Canadian energy industry is full of top-notch operators and production will continue to grow and consume the additional take away capacity. How long will there be a benefit, hard to say — there is a lot of noise in the system including emissions caps, energy transition (or the rate thereof) and reduced investment in greenfield projects.”

Hedging also plays a major role in protecting prices, with operators taking different approaches depending on their unique circumstances.

Some operators use targeted hedges to augment their market diversification strategy, applying tactical hedges in diversified markets to protect exposure. This is often seasonal as well.

Others take a more comprehensive approach, hedging large volumes to cover capital costs or to protect dividends.

Increased export offshore, improved egress and more integrated oil and gas markets should reduce price volatility. Modifications may be required to the go-forward hedge strategy, said Steinley.

“However, there is a big ‘but’ — the politics of energy. You don’t have to be in the industry long to see how rational markets are turned upside down by policy, regulation, world events or factors that make you shake your head,” she said. “I expect hedging and price risk management will continue.”

To learn more about how Canadian oil and gas operators are managing both market and non-market risks, download your free copy of the 2024 Top Operators Report here.