After posting y/y gains in every month of 2018 through October, WCSB output in November to date of 14.7 bcf/d is down by 0.1 bcf/d y/y, according to our flow sample (which covers approximately 90% of regional output). The ongoing repairs to Westcoast Energy’s T-South is curtailing British Columbia (BC) receipts, with the pipe set to operate at 1.5 bcf/d through the winter, 0.3 bcf/d below its usual capacity. Declining investment is also a factor. Through October there had been 1,005 wells drilled in the WCSB, which was 348 behind Jan-Oct 2017’s pace. We forecast that WCSB production will fall by 0.2 bcf/d y/y in both the current heating season and the 2019 injection season. Low prices are part of the reason for lower investment in drilling in the WCSB. While we forecast a Dawn premium of $0.40/mmbtu to Henry Hub through the heating season, we predict AECO will average a more than $2.00/mmbtu discount to Henry Hub over the same period. In western Canada, ongoing downstream pipeline maintenance and mild weather have both limited upward price movement. November HDDs in the west are on track to be 5% below the 10-year average, helping western Canada stem its inventory declines. November will see its y/y storage gap shrink from 100 bcf to 80 bcf, easing some support for AECO prices.
November is the first month in 2018 that will not see y/y growth from WCSB production. According to our flow sample, which covers approximately 90% of regional output, western Canada has produced 14.7 bcf/d for the month, up by 0.3 bcf/d m/m but down by 0.1 bcf/d y/y. The losses are concentrated in BC, where our sample shows receipts have declined by 0.4 bcf/d y/y, although flows are comingled between BC and Alberta on pipes that cross the provincial border. Given that BC’s y/y drop-off in our sample started in October (-0.1 bcf/d y/y), some of the decline is likely attributable to the rupture on Westcoast Energy’s T-South pipeline. Flows from key production areas in the North Montney near Fort John were cut from 1.7 bcf/d before the 9 October accident to just 1.2 bcf/d at the end of November.
Declining investment is also responsible for the fall in WCSB output. With just 394 wells spud in 2018 through October, BC is 107 wells off January-October 2017’s pace. Alberta shows a similar trend. The province has drilled 611 gas wells so far in 2018, 241 wells lower y/y. These declines are helping drive our forecast for WCSB production to fall by 0.2 bcf/d y/y to 15.7 bcf/d through the current heating season. The depressed drilling activity will have ripple effects through 2019, given the six-to-nine-month lag between when a well is drilled and first production, which is reflected in our forecast for 0.2 bcf/d in y/y losses in the 2019 injection season.
Alberta is taking steps to boost output from the energy industry as investment lags. The province’s government recently doubled the subsidy it is offering to new petrochemical projects under the Energy Diversification Act, to $1.6 billion. Alberta will also rebate 2019’s carbon taxes to drilling contractors, thought to be worth $1.2 million per company in tax relief. These initiatives amount to little more than a symbolic gesture for the industry though and are unlikely to spur a significant increase in investment. The Canadian Association of Oilwell Drilling Contractors (CAODC) projected 2019’s well count will be up by just 1% y/y as low prices strangle any incentive to increase output. This helps underpin our forecast for WCSB declines in 2019.
Low prices continue to be the norm in western Canada, even as Dawn and Henry Hub cash prices have jumped above $4.00/mmbtu. Dawn futures are steady at a premium to Henry Hub of just more than $0.40/mmbtu through the heating season in our forecast, while we predict AECO-C will average a more than $2.00/mmbtu discount to the Hub this winter (see E-mail alert: Weekly basis alert: Dawn's upside will be limited this winter as Canada swims in US gas, 2 November 2018). AECO-C cash prices have not seen the same recent rally as the other two indexes, closing at just $0.34/mmbtu on 27 November while Dawn’s cash price stood at $4.40/mmbtu.
There are several factors contributing to our forecast for a heavy AECO discount this heating season. Pipeline maintenance remains an issue, restricting the amount of gas that can flow out of western Canada. The ongoing repairs to T-South will limit flows through the pipeline—and subsequently through the Sumas border point into the US—to 1.5 bcf/d, from a usual capacity of 1.8 bcf/d through the heating season. While this is higher than previous Westcoast guidance of 1.3 bcf/d, it is still a y/y curtailment. NGTL maintenance on the Western Alberta Mainline is also cutting up to 0.4 bcf/d in flows from 20-30 November. Capacity restrictions are lifting in the US, reducing the need for Canadian gas in some areas. In the Bakken, new processing plants will allow up to 0.4 bcf/d of new US output to flow onto the Northern Border Pipeline, reducing the available space for Canadian imports coming through the Port of Morgan border crossing.
Weather is also playing a role in the divergence in prices in Canada. After October HDDs in Alberta were 10% above the 10-year average, November has seen a warming trend in western Canada that is pushing HDDs to 5% below the 10-year average in BC and Alberta. Such a mild month in western Canada has depressed regional res-com demand. By contrast, Dawn prices have risen as Ontario HDDs rose to 26% more than the 10-year average in October and are on track to be 15% higher than the 10-year norm in November.
The difference in weather across Canada is also affecting early heating season storage withdrawals. While eastern Canada is on track for a November withdrawal of 0.5 bcf/d—0.1 bcf/d above the region’s five-year average—the country’s west will see a draw of 0.4 bcf/d that is 0.3 bcf/d weaker-than-average. Daily NGTL receipts show Alberta injected gas into storage during the final two weeks of November, which has improved a historically low storage situation at the start of the heating season in the west. End-October inventories of 620 bcf were down by 100 bcf y/y, the lowest carryout in a decade. We expect the y/y storage gap to be near 80 bcf by the end of November. Storage will still be low y/y, however, less critically low than a month ago. With less support from storage, AECO’s baseline price should remain low during the heating season and injection season 2019, though cold snaps are still likely to drive short-term price increases.
|Fig 1: WCSB output y/y, bcf/d||Fig 2: BC wells drilled|
|Source: Ventyx, Energy Aspects||Source: BC Oil & Gas Commission, Energy Aspects|