Canadian producers hit again by AECO disconnect
Natural gas prices everywhere in the world are reaching new highs on the back of the European energy crisis and Russia’s aggressions in Ukraine – everywhere, that is, except Canada.
Structural issues on TC Energy’s Nova Gas Transmission Limited (NGTL) system, which moves the vast majority of natural gas produced in western Canada, have again laid waste to prices at the main AECO trading hub in Alberta as NGTL works to complete its ambitious 2021 expansion program.
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On September 9, when the Henry Hub price in the US was approaching a record US$10/mnBtu, the spot price at AECO was only a little over C$5/GJ – or under US$4/mnBtu with the exchange rate and conversion from GJ to mnBtu factored in.
“Over the last two weeks, we again witnessed the AECO market brutally disconnect from the rest of North America with the differential to NYMEX reaching an all-time high of $9.50,” Darren Gee, CEO of Deep Basin producer Peyto Exploration & Development, wrote in his September 4 President’s Report. “This disconnection is principally caused by a very inefficient system that uses price as the mechanism to force volume off the NGTL network when maintenance or expansion restricts capacity.”
But producers at AECO on the NGTL system are not the only ones impacted by maintenance. On Spectra Energy’s T-South system in BC, the spot price on September 9 collapsed to just C$0.15/GJ.
The combination of the two system issues forced Kelt Exploration, a significant Montney producer, to shut in “significant” gas volumes in BC and Alberta on “certain days” in late August.
“Commencing during the third week of August 2022, daily AECO and Station 2 spot prices dropped significantly as a result of pipeline maintenance on the NGTL and T-South systems, an unplanned compressor failure in Alberta and restrictions to gas storage injections,” Kelt said September 12.
AECO prices have recovered somewhat since late August, Kelt said, but it warned that prices could remain volatile through September and October as further maintenance on NGTL is completed. Prices on T-South, it said, should normalise after maintenance there is completed later this week.
Tourmaline Oil, Canada’s largest natural gas producer, has also been impacted by the NGTL issues, it said in a September 12 market update.
“As a result of the Alberta/BC pipeline maintenance and related natural gas price collapse at AECO and Station 2 in the second half of August, Tourmaline shut in approximately 100mn ft3/day of existing production and delayed the start-up of several new pads from August to September/October 2022,” it said.
Pricing issues at AECO during summer maintenance periods have persisted for the last several years, prompting many producers to diversify their marketing efforts away from the Alberta hub in favour of less stressed hubs in eastern Canada and the US Pacific Northwest.
Peyto, for example, is only required to shut-in small volumes – about 2,000 barrels of oil equivalent (boe)/day, or about 11,000 ft3/day – to maintain operational flexibility when AECO collapses. More than half of its 500mn ft3/day of production is marketed based on Henry Hub prices.
In response to the AECO issues, Tourmaline said it continues to strategically hedge some of its production: about 26% of its 2023 production is hedged at C$5.25/’000 ft3, while about 110mn ft3/day has been hedged at a basis differential to NYMEX of US$0.12/’000 ft3.
It's also benefiting from its exposure to the Malin hub in Oregon and the PG&E Citygate hub in California, where the majority of its volumes are unhedged to take advantage of winter (November to April) strip prices of US$8.35/mnBtu and US$9.07/mnBtu, respectively.
Tourmaline is also hooked into global LNG markets by way of a supply arrangement with Cheniere Energy covering about 140mn ft3/day of production which kicks in on January 1, 2023. About 20mn ft3/day of that volume has been hedged to the Japan Korea Marker (JKM) price during each of the April-October periods in 2023 and 2024. On September 6, the 2023 JKM strip averaged US$50.46/mnBtu.