Explainer: Why western Canada has some of the cheapest natural gas in the world

Kelt Exploration

14/09/2022 19:23

By Nia Williams
    Sept 14 (Reuters) - Despite soaring global demand for
natural gas, Canadian producers are struggling with volatile
prices and deep discounts at Alberta's AECO hub, one of the
largest storage facilities in North America and where the
benchmark price for Canadian gas is set.
    In August the spot AECO price briefly turned negative, and
this week producers Tourmaline Oil  TOU.TO  and Kelt Exploration
Ltd  KEL.TO  said they temporarily cut production due to weak
prices.  urn:newsml:reuters.com:*:nL1N30J1MK
   
    WHY ARE AECO PRICES LOW?
    Canadian producers have been struggling with volatile
pricing for years because of tight capacity on pipelines
shipping gas from Alberta and British Columbia to North American
markets. The problem tends to worsen every summer when pipeline
maintenance work reduces capacity.
    The main system gathering and transporting gas out of
western Canada is TC Energy's  TRP.TO  Nova Gas Transmission
Line (NGTL), which delivered 12.5 billion cubic feet a day
(bcf/d) in 2021, accounting for around 75% of Canada's overall
production.
    Rising production, NGTL maintenance and some gas processing
facilities' outages this summer left gas molecules bottlenecked
in Alberta, driving down the spot price for interruptible
pipeline service. Customers with firm service contracts were
unaffected.
    Since late August, the price has recovered to trade at $3.50
per million British thermal units. But the discount to U.S.
benchmark Henry Hub prices, which analysts say should be around
$1 to reflect the transportation cost, is still more than $5.
    
    HOW DOES THIS IMPACT PRODUCERS?
    Many Canadian producers have entered into forward contracts
to hedge their risks or sell directly into other markets such as
Ontario's Dawn hub. 
    In a recent National Bank research note titled "AECO is
Lame", analysts estimated on average only 15% of producer
revenues are exposed to western Canadian prices.
    Still, low prices result in lost royalty revenues for the
Alberta government and deter capital investment, producers said.
    
    DOES ANYONE BENEFIT?
    Gas and electricity consumers in western Canada and large
industrial consumers like oil sands companies and Alberta's
petrochemical sector have cheaper bills due to low prices.
    
    COULD THE REGULATOR STEP IN?
    The CER is monitoring the situation, its chief economist
Jean-Denis Charlebois told Reuters, but will not intervene
without being asked by parties involved.
    In 2019, when AECO prices endured a longer-lasting slump,
the regulator enacted a protocol that allowed shippers to put
more gas into storage and avoid selling it at very low prices.
That protocol expired at the end of 2020.
    The CER is open to helping improve the situation, whether
that be through hearing revised tariff proposals to conducting
workshops to help communication between parties, he said.
    
    WHAT DOES TC ENERGY SAY?
    TC Energy attributed the deep AECO discount to abundant
western Canadian supply and limited pipeline space, and said the
solution is to build extra capacity for firm service contracts.
    TC is working to add 1.3 billion cubic feet a day (bcf/d) of
capacity in 2022 and another 2.2 bcf/d between 2023 and 2026,
but has been delayed by weather, labour shortages, increasing
environmental requirements and regulatory and government delays,
a spokesperson added.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Canadian natural gas companies shut in production due to weak
pricing     urn:newsml:reuters.com:*:nL1N30J1MK
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Nia Williams; Editing by Lisa Shumaker)
 ((nia.williams@thomsonreuters.com; +1 403 531 1624; Reuters
Messaging: nia.williams.thomsonreuters.com@reuters.net))