Canadian Gas Market “Complex and Bearish”
Canada’s natural gas market has become “very complex and bearish”, Martin King, director of institutional research at investment bank GMP FirstEnergy, told a commodities update breakfast May 1.
“US gas markets and Canadian gas markets are on very different playing fields, with Canadian gas pipeline issues playing havoc with prices and balances,” King said.
The loss of market share in the US to rapidly increasing US domestic supplies – primarily from the Marcellus and Utica shale gas fields in the northeast and associated gas production from the Permian Basin in Texas and New Mexico – is well documented. Less so, King said, are the increasing number of challenges beyond that market loss.
“Forward markets for AECO have become extremely bearish in the past year, undermining investor sentiment and producer enthusiasm,” he said. “This has created a distinct price dichotomy between US and Canadian markets for the first time since the late 1990s.”
Illustrating that dichotomy is the AECO-Nymex price differential, which has widened from less than US$0.20/mn Btu in 2014 to an estimated $1.47/mn Btu this year.
Topping the list of challenges facing Canadian producers is the lack of pipeline egress out of the Western Canadian Sedimentary Basin (WCSB), which has seen “unprecedented” supply growth in recent years thanks to the development of the Montney and Deep Basin shale gas resources. Those two plays, King said, now account for between 60% and 70% of total WCSB supply.
Supply gains this year are expected to average about 300mn ft3/day, King said, but could drop next year if producers react to low prices by shutting in gas. But they are forecast to resume again in the 2021-2022 timeframe, to around 400mn ft3/day, as new pipeline capacity out of the WCSB finally begins to come online.
The lack of egress capacity is magnified by a change in the way TransCanada manages flows during periods of pipeline maintenance on its NGTL system in Alberta. Instead of restricting firm transportation, only interruptible transportation (IT) – usually used to move summer gas production into storage – is restricted, which backs supplies into Alberta, crushing prices at the AECO hub.
This week, with new maintenance projects now underway, AECO prices fell below $0.48/mn Btu, King said in his May 2 Weekly Canadian Natural Gas Supplement, and could trade at very weak levels for much of May, given the extent of field maintenance scheduled by TransCanada and accompanying IT flow restrictions that will be in effect.
“Forward prices have been long signalling weakness for May (and June) with the AECO May contract expiring on April 30 at $0.54/mn Btu, its lowest level since it began trading back in 2012,” King said in the May 2 research note. “June forward prices also continue to deteriorate with the close of May 1 at $0.72/mn Btu, also a life-of-contract low.”
Despite his bearish near-term sentiments, King sees some upside for Canadian producers in 2019 and beyond, as the backlog of gas begins to clear in 2019 and accelerates beyond then as new egress capacity is added.
“The positives are that supply upside beyond 2018 is likely very limited due to issues upstream of AECO, the US may actually need more gas than we expect, Alberta demand is growing and Alberta storage levels could end up being significantly lower than in recent years,” he said. “And a positive FID on the LNG Canada project this year could provide a major sentiment boost for the gas-levered portion of the industry and provide an additional outlet for rising unconventional supplies.”