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Nova Supply Forecast Supports Winter Price Spike

Nova Supply Forecast Supports Winter Price Spike

A supply/demand forecast released by Nova Corp. confirms what many market observers have expected: Canadian gas producers will be hard pressed to fill all the new transportation capacity coming on line this winter and could find it even harder to fill storage and meet demand next summer.

"We have already seen a dramatic price spike this winter going forward into next summer due to the increased capacity," said one Canadian marketer, quoting November-through-March term deals at C$2.80-84/Gj, which is 60 cents more than last winter. "We feel the net effect of the increased pipeline capacity will make Alberta the place to be in terms of having natural gas assets. This is already becoming a reality in the prices," he said.

Nova, however, presents a relatively optimistic assessment of winter production. It is expecting 12.9 Bcf/d of field receipts, a 500 MMcf/d increase from this summer and 700 MMcf/d more than last winter despite the significant decline in rig utilization this year. Field receipts last winter averaged 12.4 Bcf/d, up only 200 MMcf/d from the previous summer. The forecast is based on Nova's expectations that rig utilization will rise slightly, gas well completions will be similar to the strong performance last year and gas well connections will exceed last year's levels by 21%.

The relatively strong performance by producers, however, will not be sufficient to fill the 1.1 Bcf/d of new transportation capacity expected to be added by TransCanada (417 MMcf/d) and Northern Border (700 MMcf/d) this winter, and Nova expects storage to make up the shortfall.

"We have seen a shift in capacity-supply dynamics, and we saw this signaled in the forward markets around the summer," said TransCanada spokesman Gary Davis. "The real shift is that in the past supply coming from the field met demand and storage was a pricing option. What's happened this year is will not be enough to meet the demand by itself so storage will turn from a pure pricing option to a supply and pricing option. To meet the 13.8 Bcf/d [of average expected deliveries] what you're looking at is 12.9 Bcf/d in field receipts (production) and 900 MMcf/d of storage withdrawal." That's 200 MMcf/d more gas from storage required to meet average demand than occurred last winter. But Nova's Jeff Rush noted storage was half full when last winter was over.

"900 MMcf/d is not a big stretch," said Davis. "If we have a real cold winter it will be more of a challenge." Nova is expecting demand to peak on the coldest days at 14.2 Bcf/d, which would require the total pipeline capacity available, including the 1.1 Bcf/d added by TransCanada and Northern Border. On those days, storage will be responsible for serving 1.3 Bcf/d of demand. Davis said maximum storage withdrawal capability available to the pipeline system is about 2 Bcf/d.

"This is a manageable situation but it is a harbinger of a more serious supply issue that we'll face in the future," he said. "We're okay this winter and probably for next winter, but when Alliance comes on line and brings another large increment of supply in 2000, that's when we'll see a more significant dynamic between supply and capacity.

"The real issue here, I think, is that something has occurred that people didn't anticipate and that is the problems in the equity markets. There's just not enough cash to support drilling. That's something that no one contemplated coming into this year."

Rocco Canonica

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