“We simply do not have the capacity to take the gas out of the province to that better market”
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Imagine the neighbors are throwing an epic summer party, but you’re not invited.
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That’s the feeling some natural gas producers in Western Canada must have these days.
Natural gas prices are on the rise south of the border, with benchmark US spot rates rising about 7 percent on Tuesday to hit a 14-year high.
On Monday, US benchmark prices closed at US$9.03 per thousand cubic feet (mcf).
In Alberta, the spot price for AECO natural gas closed at US$2.75.
That’s a punitive $6.28 differential compared to gas sold in the US, according to ATB Capital Markets, and prices are much, much higher abroad.
Any way you look at it, prices globally are soaring as demand increases, yet in recent weeks Western Canadian operators have been sitting on the sidelines.
“Producers aren’t getting paid as much as they should be, given how natural gas prices are in North America. . . I don’t even want to guess how much royalty income has been lost because of this,” said Phil Hodge, CEO of Calgary-based Pine Cliff Energy.
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“It’s frustrating, very frustrating,”
Western Canadian natural gas producers are used to seeing volatility and a discount in key hub Alberta relative to US markets in recent years.
The spread between the US Henry Hub in Louisiana and the Alberta AECO price narrowed earlier this year, but has come back with a vengeance this summer.
Companies and analysts cite familiar problems for their unwelcome return: a lack of available pipeline capacity in the region, summer maintenance work on existing transportation networks, and increased production in western Canada.
“It is more of the same. We just don’t have the ability to get the gas out of the province to that better market,” said Darren Gee, CEO of Peyto Exploration and Development Corp.
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Global natural gas prices have taken off in the past year, buoyed by an economic rebound as pandemic restrictions were eased and then by the Russian invasion of Ukraine. The energy crisis unfolding in Europe and the growing demand for liquefied natural gas (LNG) have pushed markets higher.
European prices were near record levels on Tuesday; prices in the US have risen 150 percent this year for the first-month contract, according to Reuters.
In Western Canada, gas prices have also been relatively strong this year, with the AECO spot price topping $6 per mcf in early May.
However, the discount between Alberta and US spot prices has widened in recent weeks, from $1.56 per mcf in early July to more than $6 earlier this week.
Analyst Jeremy McCrea at Raymond James said typically the price spread should be between 75 cents and $1 per mcf to account for transportation costs to ship gas from Alberta to the US Gulf Coast. .
“Now it’s reaching astronomical proportions,” McCrea said of the discount.
“Just when gas producers have an opportunity and a good chance to repair balance sheets and put themselves in a much stronger position with these higher gas prices, they can’t do it.”
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Natural gas production in western Canada has been rising this year, averaging about 17.4 billion cubic feet of production per day this month, one bcf per day more than the year before, said Martin King, senior analyst. of RBN Energy in Calgary.
That surge is putting pressure on the existing pipeline network.
“The end result is more supply than the market can handle, and prices go down,” he said.
Some gas producers have become exasperated with AECO price volatility in recent years and have increased their transportation options by signing deals to ship gas to other markets.
“Larger producers have generally diversified out of this market because they knew it was subject to these types of disconnects,” Gee said.
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“What does it take to reconnect it? Hopefully LNG Canada and West Coast LNG exports will help.”
But the deep discount will cost Alberta taxpayers, since royalties are based on the selling price of the product. King conservatively estimates the industry’s revenue loss due to deep discounts of more than $1 billion per month for July and August.
All parties, including the province, regulators, pipeline companies and gas producers, need to sit down and find a way to solve the problem, said Tristan Goodman, president of the Canadian Explorers and Producers Association.
“We are less concerned with how it is fixed, but it needs to be rectified,” he said.
In recent years, producers said AECO gas prices became increasingly volatile after changes by TC Energy’s Nova Gas Transmission Ltd. (NGTL) system on how it would limit access to storage during maintenance periods. summer.
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Some point to the province helping to reach a deal in 2019 that ensured the gas could be stored during those times, though the temporary protocol has since expired.
Alberta Natural Gas Associate Minister Dale Nally was not available for an interview but said in a statement the government will monitor the situation and “respond appropriately.”
TC Energy officials said total deliveries on the NGTL network were up nine percent in the second quarter from a year ago and noted that there has been access to storage over the summer.
TC Energy will commit $5.8 billion in capital to NGTL by 2024, including for system expansions. Ongoing projects will add 3.5 bcf per day of capacity by the end of 2026.
At Advantage Energy, CEO Michael Belenkie believes a long-term solution must be found for a “dysfunctional” market in Alberta.
“We don’t think we should sell incremental gas in the AECO markets. We are going to try to avoid that for several years because the system is not working properly,” he said.
“The Alberta government, and more acutely Alberta taxpayers, should be deeply concerned about what is happening, what has continued to happen for the last five or six years, because this is the resource that belongs to the people of Alberta.” .
Chris Varcoe is a columnist for the Calgary Herald.
