As the invasion of Ukraine continues, global energy prices continue to soar. European (TTF) and Asian (JKM) gas futures once again eclipsed $40/MMBtu, while spot prices pushed near $60/MMBtu. Correspondingly, crude oil pricing has breached $115/Bbl with several pundits calling for $150-$200/Bbl crude to elicit demand destruction. With global prices increasing, new sources of energy supply will be critical to the market. Today’s energy market insight will provide an update on the outlook for Canadian natural gas production and its ability to temper rising energy prices due to Russian supply concerns.
Canadian natural gas production is primarily concentrated in British Columbia and Alberta, and currently the US is the only destination for Canadian natural gas production. While Canadian producers have signaled intentions to grow production over the coming years, pipeline capacity into the US market is already highly constrained. The chart below shows pipeline utilization into the Pacific Northwest as an example of pipeline constraints facing Canadian producers.
So far this winter (Winter ‘21/‘22), GTN pipeline utilization has averaged 95% while NWPL pipeline has averaged 88%. The Pacific Northwest is not the only market in the US served by Canadian producers. Canada also sends gas to the Midwest and New England markets. Both markets show similar dynamics as the flows into the Pacific Northwest. For the Midwest market, both Northern Border and Alliance run at near 100% capacity into Chicago. For the New England market, pipelines run at 100% utilization in winter and in the summer are displaced by Marcellus and Utica production. With US outlets for incremental Canadian production limited, the ability for Canadian natural gas production to grow will be limited to the development of new pipeline and LNG infrastructure.
Canadian LNG development has primarily focused on developing new facilities on the West Coast of Canada in British Columbia. Over 20 projects have been proposed on the West Coast, but currently only a few are in advanced stages. The table below provides a summary of five projects in advanced development.
Canada LNG represents the largest and earliest source of potential LNG from the West Coast of Canada. Phase 1 of Canada LNG began construction in 2019 and is now expected to be complete in 2025. The facility will add 1.8 Bcf/d of demand for Canadian natural gas and provide the global market with 13 MTPA of LNG supply when completed. Canada LNG is not the only project under development, but the remaining facilities have yet to begin construction. Several micro-LNG facilities have been proposed but these add only a small amount of demand. Larger projects like Cedar, Woodfibre, and Ksi would add more material amounts of demand, but they are further behind in development with in-service dates slated for 2027 or later.
While new LNG export facilities are critical sources of demand, the pipelines connecting them to supply in British Columbia and Alberta must also be completed. Pipeline development in British Columbia continues to face pushback with the critical Coastal Gas Link pipeline recently being attacked. The table below provides an overview of the pipeline projects proposed to feed the new LNG terminals.
The Coastal Gas Link is the most critical project as it feeds Canada LNG. The project is currently over 50% complete and is expected to be in-service in 2023 ahead of Canada LNG. The pipeline is also expandable and could help support either an additional facility in the region or an expansion of Canada LNG.
Without a dramatic acceleration in the construction timelines for Canada LNG, Canadian natural producers are likely to see little benefit from rising European and Asian LNG prices in the near term. Over the longer term, additional projects could see commitments as shippers look to capture the arbitrage opportunity between Canadian natural gas prices and Asian LNG prices. However, development of Canadian facilities over the last decade has been much slower than competing LNG development in the US, creating potential headwinds for future development.