[Premium] Western Canadian Prices To Firm, Competition to Stiffen in East: Analyst
Producers in western Canada can expect to see stronger natural gas prices at the AECO trading hub in Alberta next year, but will also face stiff competition from US shale gas at the key southern Ontario trading hub at Dawn.
In a September 27 research note, Martin King, director of institutional research at investment bank GMP FirstEnergy Securities, forecast that AECO gas will average C$3.61/’000 ft3 in 2018, up from a forecast 2017 average of C$2.57/’000 ft3 and the average last year of C$2.17/’000 ft3.
“For Canada, it is a delicate situation where its own supply expansion is running headlong into stiff U.S. supply competition in eastern markets,” King said. “We believe the upcoming winter will reset all prices back to more stable and higher levels after a summer of intense price discounting.”
GMP FirstEnergy is projecting Canadian natural gas supply will grow by 150mn ft3/day this year, by 300mn ft3/d next year and by 400mn ft3/d in 2019. Virtually all of the supply gains will come as a result of focused drilling in the Montney and Deep Basin shale gas and tight gas plays.
While drilling in those plays has been robust for the last few years, pipeline takeaway capacity out of the Upstream James River (USJR) region has been constrained. Interruptible transportation service to storage has been eliminated, which has held prices down significantly at AECO, King said, and spot prices there actually fell into negative territory on two occasions this year.
Two of the three pipelines servicing the USJR, however, are working on capacity additions, King said, with the key upgrade coming from TransCanada, which is expected to put 1.0bn ft3/day of new capacity into service starting in November. Enbridge, which owns the Westcoast Pipeline system that takes gas to Pacific Northwest and US west coast markets, is making enhancements that should add about 250mn ft3/day of capacity in 2018 and 2019.
The increased Canadian supply, King said, will at least have some enhanced ability to reach market with the regulatory approval in September of a discounted mainline tolling agreement between TransCanada and 23 of its shippers. Starting on November 1, an estimated 1.5bn ft3/d of flow will be sustained between Empress, on the Alberta border, and the Dawn trading hub in southern Ontario on the opposite side of Canada.
But while the gas will have an outlet to market, it will also face stiff competition at Dawn. Energy Transfer Partners’ US$4.2bn, 3.25bn ft3/day Rover Pipeline Project is already partially in service and moving about 700mn ft3/day of Marcellus and Utica gas between eastern and western Ohio, King said. When the pipeline is completed in 1Q2018, it will send 1.1bn ft3/day of US gas into Dawn and, with demand there basically flat, “pricing competition could get messy for Alberta gas,” King said, adding that it might get even messier later.
“If the Nexus pipeline (a partnership of DTE Energy and Spectra Energy Partners, owned by Enbridge) does go ahead to construction and completion in 2018, after receiving approval from the FERC earlier this year, this could bring another 900mn ft3/d of US northeast gas supply into Dawn,” he said. “This would clearly be too much gas and create additional overhead pricing pressure for Alberta gas supplies.”
Dale Lunan