Western Canada producers are selling off a surplus of steeply discounted natural gas that piled up during a prolonged pipeline service interruption last year.
Flows have swelled to about 1 Bcf/d more than previous heating season peaks on TransCanada Corp.’s restored and expanded Alberta and British Columbia supply collection network, Nova Gas Transmission Ltd. (NGTL).
Daily gas traffic reports by NGTL show volumes running in a range of 14-15 Bcf/d, including inflows from brimming storage sites as well as production fields, even during warm weather reprieves from heating fuel demand.
The supply backlog developed last fall, when NGTL temporarily shut down about 2 Bcf/d of receipt service in northern Alberta and British Columbia to construct delivery capacity and upgrade aging pipe to run at increased pressure.
Effects of the months-long traffic outages and heightened competition for pipeline space showed in severe lows registered by a Western Canadian gas industry barometer: the Alberta Reference Price (ARP), a monthly weighted average value of actual production for all destinations compiled for calculating provincial government royalties.
In the first month of the NGTL outages last September, the ARP fell by 43% year/year to C$1.20/gigajoule (GJ), or US$1.00/MMBtu, from C$2.12/GJ ($1.78/MMBtu).
The ARP bottomed out last October at C$1.11/GJ (93 cents/MMBtu) — 54% lower than in October 2016 when it recorded C$2.41 ($2.02).
The pipeline outage slump made Canadian gas producers miss an overall 2017 recovery that buoyed their counterparts in the United States, according to a year-end market summary by the National Energy Board (NEB).
Canadian benchmark prices at the AECO hub stagnated at a 2017 annual average of C$2.06/GJ ($1.73/MMBtu), down 1 cent from 2016.
In sharp contrast, the NEB gas price scorecard showed a 17% gain by the Henry Hub benchmark annual average to C$3.65/GJ ($3.07/MMBtu) from the 2016 performance of C$3.13/GJ ($2.63/MMBtu).
Canadian prices recovered — but only part way — after NGTL completed its renovations and tapered off its pipeline outages in time for the traditional November start of the gas market year.
The ARP monthly average struggled back up to C$1.92/GJ ($1.61/MMBtu) last November, but was still down by 22% from C$2.48/GJ ($2.08/MMBtu) year/year.
Prices fetched by Western Canada gas production still have a long way to go to catch up to the stronger U.S. market, showed records kept by Calgary energy equities boutique GMP First Energy and the Petroleum Services Association of Canada.
As of market close on Wednesday (Jan. 24), the Calgary agencies reported a year-to-date average AECO price of only C$2.06/GJ ($1.64/MMBtu) — fully C$2.21 ($1.77) or 51% less than the Henry Hub performance of US$3.44 so far this year.
The trouble is temporary and should be cleared up by longer-term market and pipeline developments, suggested the ARC Energy Research Institute, an arm of a prominent Calgary oil, gas and technology investment house.
“Fifty percent discounts don’t last forever,” said an ARC market review. “On the supply side economic theory predicts less supply at lower prices. Already a few producers have downgraded their 2018 production and capital spending guidance in response. More revisions are likely…
“On the demand side, growth is expected. Based on announced expansion projects to 2020, natural gas exports from Western Canada to Chicago and the U.S. West Coast could grow by 1 Bcf/d. At the same time, growing domestic consumption from power generation and oilsands should add nearly 1 Bcf/d of demand.”
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