Infrastructure concerns are depressing our outlook for both Westcoast Station 2 (WC2) and AECO-C cash prices this summer. We forecast an average WC2 basis discount of $2.15/mmbtu to Henry Hub, $0.21/mmbtu wider y/y. Restrictions for exports to the US through the Sumas point, due to a 2018 explosion and new work limiting summer 2019 flows by up to 0.4 bcf/d, will contribute to softness. The Q4 19 start-up of the 1.5 bcf/d North Montney Mainline is also likely to be bearish for WC2, pushing it to a $0.40/mmbtu discount to AECO in Q4 19 as more Alberta gas flows west. Before that pipe starts-up, AECO is set for further maintenance-induced headaches. We project an AECO discount to Henry Hub of $1.80/mmbtu during injection season 2019. The NGTL’s debottlenecking program will not yet have started, while new events are still being added to this summer’s work schedule. AECO’s saving grace might be inventories, as a February cold snap in Alberta should see the province match the decade’s low end-March carryout of 385 bcf.
The highly anticipated Roadmap to Recovery was published earlier this heating season by Alberta’s natural gas advisory panel, focussing on how to revive Western Canada’s gas industry. It highlighted takeaway capacity constraints as one of the major issues keeping western prices depressed. However, the effects of infrastructure restrictions are not confined to just Alberta, as one of the indexes most prone to wild swings based on such issues is based in British Columbia (BC). Westcoast Station 2 (WC2) has borne the brunt of this winter’s takeaway problems and we expect additional volatility throughout 2019.
We forecast a WC2 cash discount of $2.15/mmbtu to Henry Hub during injection season 2019. This discount would be $0.21/mmbtu wider y/y, despite October 2018 featuring several days of negative pricing following the 9 October explosion on Westcoast Energy’s T-South (see Monthly: Canada – Fire and mud, 22 October 2018). The aftermath of that incident drives our projection for continued heavy WC2 discounts. One of the main markets for BC gas is the US, through the Sumas border point. However, T-South is currently flowing 1.6 bcf/d of its 1.8 bcf/d capacity, as Westcoast continues repairs in the wake of the explosion. Sumas flows are down by 0.2 bcf/d y/y to 0.8 bcf/d so far in 2019 due to the limitations. Sumas deliveries will be further reduced by a 0.4 bcf/d flow restriction at Station 4B between March and September 2019.
This winter has been relatively mild. BC continued injections into January, fully eroding the y/y storage gap in the province that opened the winter at 6 bcf (10% of inventories). During injection season 2018, cooling degree days in BC were 17% above the 10-year average. While cooling load does not play the major role on total demand that exports do, a reversion to normal weather this summer would further limit BC gas demand and put downward pressure on WC2 basis.
We predict WC2 discounts will extend into next winter, as new infrastructure will further weigh on BC gas prices. The 1.5 bcf/d North Montney Mainline is expected to enter service in Q4 19 or Q1 20, allowing more Alberta gas to head west into BC. We project WC2 will sit $0.40/mmbtu below AECO-C in Q4 19 as additional AECO gas competes directly with WC2.
AECO itself is in for another summer of heavy maintenance, even as its discount moderates somewhat y/y on projections for a near historically-low end-winter storage carryout. Our forecast calls for an average AECO discount to Henry Hub of $1.80/mmbtu during injection season 2019, $0.28/mmbtu narrower y/y. Infrastructure problems—as mentioned in the Alberta panel’s report—continue to be the driving factor behind major AECO discounts, as they are every year. A concrete plan of action in response to the Roadmap to Recovery is not expected to be submitted to local regulators until mid-2019, with work beginning in 2020. Even recent expansions on the NGTL system, which have boosted capacity between the Empress point (on the border of Alberta and Saskatchewan) to consumption points in eastern Canada, have not been matched by expanded capacity to transport gas from NIT to Empress.
While the Empress limitations will curb AECO’s capacity to the east, the annual summer maintenance schedule will disproportionately restrict gas heading west into BC. While preliminary schedules pointed to lighter maintenance during summer 2019 at East Gate and the Upper James River, the original outages planned at West Gate were flat y/y (see E-mail alert: Blame TransCanada! ...even though 2019 pipeline maintenance set to be lighter than 2018, 10 January 2019). Additions since TransCanada’s initial schedule was published increased planned work affecting West Gate flows. Twelve extra days of maintenance have been added to the 135 already scheduled, limiting AECO takeaway to the west by 0.2 bcf/d on average this summer.
The saving grace for AECO pricing this injection season might be Alberta’s incredibly low inventories. The province entered the winter with 514 bcf in storage, a y/y storage gap of 105 bcf. A February cold snap will ensure Alberta is unable to close the gap, as current forecasts indicate temperatures in Calgary will not rise above freezing once during the entire month. NGTL daily storage receipts point to a monthly withdrawal of 2.1 bcf/d, 0.7 bcf/d above February’s five-year average and the highest reading for any month since the 2014 Polar Vortex winter.
We forecast an end-March storage carryout in Alberta of 385 bcf, matching the low for the decade set during the Polar Vortex. This could add one bullish factor to an otherwise dour AECO outlook, as the need to refill storage will act as a key demand pillar this summer (see E-mail alert: Weekly basis update: AECO bearish factors to unfold soon, 15 February 2019). Of course, any works impacting interruptible transport would also impact use of storage too, potentially offsetting the impact from lower inventories. A second bullish factor for AECO will be the 0.4 bcf/d y/y decline in WCSB gas production during the coming injection season, which will also exacerbate the storage gap as inventories have less gas to refill. While we still expect heavy AECO discounts, there is potential for narrowing basis as the 2019 winter draws closer and inventories stay low.
|Fig 1: Canadian net exports at Sumas, bcf/d||Fig 2: Alberta end-March storage, bcf|
|Source: Ventyx, Energy Aspects||Note: 2019 is a projection.
Source: StatCan, Energy Aspects