TD Securities recently published an excellent summary of why Alberta gas prices have weakened so much and why we can expect them to remain low until 2021.
Beginning in the second half of 2017, Alberta natural gas prices began to plummet and to show incredible volatility.
Alberta’s decreased natural gas prices can be primarily attributed to three factors:
- Interruptions on the intra-Alberta Pipeline System
Extensive maintenance disruptions and weather-related issues have affected the flow of natural gas from well-head to outlet stations and to underground storage. This is expected to be a recurring problem until more compression is added at the eastern Alberta border. On February 15, TransCanada PipeLines Limited (TPCL) announced the intra-Alberta pipeline system will continue its expansion project in southern Alberta at Empress along the Saskatchewan border. The expansion, already partially in service, would be completed by April 2021. These disruptions are occurring simultaneously as production is increasing in Alberta.
- Growing Canadian Domestic Supply
New supply basins as well as new technologies have resulted in increased production at lower costs. Although the production is increasing, the pipeline infrastructure to deliver the gas supply to traditional destinations is not available. Additionally, western Canada storage levels remain abnormally high despite this year’s early cold winter.
- Decreased US Demand as its Natural Gas Supply Increases
Traditionally, the US has imported much of Alberta’s natural gas supply production; however, the US has experienced a prolific growth of its own in the order of a 56% increase in the last 10 years. 60% of this expansion in natural gas production is destined for use in industrial and electric power plants while 40% represents exports to Mexico, Canada and Liquified Natural Gas (LNG) shipments.
Alberta Prices Expected to Stay below $2 Until 2021
Currently, there is a negative sentiment surrounding Alberta natural gas prices. In TPCL’s most recent update to their Daily Operating Plan, they added new outage events for this summer. This could put further downward pressure on prices.
However, like any commodity market, there are a several influences that could create natural gas price increases as early as Q4 2018 or Q1 2019. These include the following:
- Production Response
Many producers hedged at higher prices. However, those who didn’t may decide to cut production. Also, hedges will run out, and if Alberta prices continue to be weak, more producers will shut in production. Producers typically don’t want to shut in production as there are many other factors that motivate producers to continue, even if simple economics show the cost to produce is less than the sale price. Therefore, it is unlikely Alberta gas production will decline this summer.
- Planned Pipeline Expansions
There are many new pipelines surrounding Alberta that are designed or are in the planning stages. If all or most are constructed, natural gas flow will not experience the same amount of interruption to their destinations.
- Growing intra-Alberta Gas Demand
Alberta is reducing its coal consumption and replacing it with natural gas. Natural gas usage for oil sands projects continues to increase.
- Further Demand Growth from North American LNG projects
Liquified Natural Gas (LNG) is operational at various sites in the US and more are planned there as well as in Canada. Alberta wants to build an LNG terminal on the west coast of British Columbia but is experiencing opposition.
Beyond Alberta
From a consumer perspective, it is good to see that natural gas prices are low and expected to stay that way in the foreseeable future. However for natural gas transported to companies in Ontario and Quebec, the Alberta price is only part of the story. Natural gas needs to get out of Alberta and into Ontario. A different set of dynamics affect these transportation components. For instance, the cost to move gas out of Alberta and onto the TCPL was around 0.25/GJ. With interruptions occurring and with TCPL changing their toll methodology, the result has been a huge price increase in the secondary market.
The relationship between natural gas, the Nova Gas Transmission Ltd. (NGTL) systems’ intra-Alberta transportation and TCPL long-haul transportation has changed dramatically and created huge volatility. On the downstream side of the TCPL pipeline, Dawn Hub storage inventory levels continue to draw down significantly faster this season than last. Inventories could fall to levels far below the previous five-year average. However, filling storage should be easier than past years with access to cheap supply from Alberta and the US.
Alberta gas is becoming less significant in the overall North American natural gas market. Ontario stands to benefit as its natural gas supply sources become more diversified. Despite the changing dynamics of the gas supply commodity and natural gas transportation from Alberta to Ontario, the fully delivered natural gas price into Ontario has remained relatively stable and priced significantly lower compared to US prices.
Opportunities exist to take advantage of the dynamic North American natural gas market.
