Canadian Gas Producers Remain Hostage to Weather, US Exports
The Canadian natural gas market is in a “precarious” balance between bullish potential and what could be “extremes of price weakness” over the next year or two, GMP FirstEnergy Securities analyst Martin King said October 25.
“Two things will determine the fate of Canadian natural gas prices over the next 12 to 24 months,” he told GMP FirstEnergy’s Energy Market Update breakfast in Calgary. “The severity of the upcoming 2017/18 winter heating season and the magnitude of US domestic supply growth, which will be heavily influenced by LNG export growth.”
Through the late summer and early fall of this year, King said, the Canadian gas market was characterised by rising US and Canadian supply growth and too little downstream demand, exacerbated by infrastructure restrictions in key supply basins of western Canada.
The result was a collapse at the AECO/NGX trading hub, where spot prices at times fell into negative territory and generally hovered around $1 per thousand ft³ ($1/mn Btu). As a result, the basis between AECO and Henry Hub (the main US gas trading hub) “has blown out” in recent months, King said, with the differential for this year expected to average about US$1.20/mn Btu, compared with $0.92/mn Btu in 2016 and less than $0.20/mn Btu in 2014. On October 24, the differential closed at C$2.39/thousand ft³, or about US$1.80/mn Btu.
Much of the problem in recent months can be traced to maintenance work on TransCanada’s system, particularly in the Upstream James River (USJR) region, where most of the Canadian supply growth is focused. During the summer, TransCanada began restricting interruptible transportation (IT) flows instead of firm transportation (FT) flows to deal with the reduced capacity caused by the maintenance work.
“The problem arises because AECO is priced at the margin on spot supplies,” King explained. “When IT is restricted, spot gas is restricted from escaping Alberta and storage also becomes unavailable, and the end result is gas supply backing up with few buyers and frequent price crashes.”
TransCanada’s maintenance work should add about 1bn ft³/day of capacity out of the USJR area this winter to help move new Montney gas volumes to market, while capacity upgrades on the Westcoast and Alliance systems will also help, but not until late next year for Westcoast and late 2020 for Alliance.
That leaves Canadian producers hostage to events beyond their control for the coming key winter heating season, King said.
“In the near term, Canadian natural gas needs strong US import and US demand – LNG and pipeline exports – growth and/or a cold winter to sustain more reasonable prices,” he said. “Preferably, we see both.”
Dale Lunan