As Henry Hub rallied this month, Western Canadian gas producers have been distinctly isolated from global tailwinds. In fact, during the first 23 days of the month, outright AECO prices fell $5.23 to close at just $0.03/MMBtu. Henry Hub gained $1.19 during this same period to close at $9.85/MMBtu.
The extreme break in these commodity markets can be explained by the highly constrained network of takeaway pipelines in Western Canada. As BTU previously analyzed in the October 2021 Upstream Outlook, bullish growth outlooks from Western Canadian producers will be difficult to sustain without blowing out regional basis. Today’s Energy Market Insight examines the fundamentals that drove the most recent pricing crash.
At the end of 2021, leading Canadian producers, including Tourmaline, ARC Resources, and CNR, announced plans to grow gas production in response to improving global commodity prices. Production growth was evident as NOVA-system production receipts rose steadily through 2022. On July 24th, 2022, receipts reached their highest level over the last decade at 13.9 Bcf/d.
As production reached these levels, AECO basis began to widen during the end of June and July. This growth in production in July put downward pressure on AECO, causing it to disconnect further from Henry Hub prices. However, Canadian producers were soon to feel even more pricing pressure in August.
Seasonal maintenance on several major arteries out of Western Canada, which has been ongoing throughout August, has contributed to an even more dramatic blow-out in prices at AECO. First, on westbound corridors, overlapping outages appear to have reduced capacity on both Westcoast and NOVA’s Kingsgate interconnect with GTN. The result of the combined outages was a nearly 0.9 Bcf/d drop in flows between August 1st and August 8th, coinciding with the first price crash identified above. Kingsgate appears to have returned to its normal summer capacity, but Westcoast’s maintenance schedule suggests that capacity will be reduced at its Huntingdon border point for the remainder of August.
The second set of maintenances impacted flows entering the US Midwest and Eastern Canadian markets. For natural gas volumes heading east, natural gas takeaway relies on three points delivering natural gas to Northern Border, Alliance, and the TC Mainline. The McNeil point, which delivers to Alliance, saw a drop of more than 0.5 Bcf/d from August 14th to August 16th and has yet to see volumes fully recover. The Empress point, which delivers to the TC Mainline, also fell through the beginning of August. Postings from TC Energy suggest that compressor outages within the NOVA gathering system have restrained the effective capacity of Empress and other eastern points.
Seasonal maintenance should be expected to continue through August, and until these systems are ramped up for the full winter capacity, AECO pricing will continue to come under pressure. The hairline balance of this network is narrow enough that any fluctuation in production or midstream capacity can be expected to drive high price volatility in the meantime. For more analysis on gas basis and the effect of midstream dynamics on producers, contact BTU for a trial of the Gas Basis Outlook or Upstream Outlook.