Gas production in Western Canada is down y/y, in line with our early year projections for 2019. Western Canada Sedimentary Basin (WCSB) output has declined by 0.5 bcf/d y/y over January-July, with flow data indicating August averaging a 1.0 bcf/d y/y drop in receipts. We project the basin will see a 0.6 bcf/d y/y fall over H2 19. The ongoing trends of low drilling activity and weak AECO-C prices are fuelling the current production slide, as are interruptible service disruptions into storage on the NGTL system. Those pipeline outages have pushed Alberta storage to a 65 bcf y/y deficit by stranding gas upstream of demand and storage sites. In response to the issues caused by maintenance, TC Energy has proposed a new, temporary operational protocol that would prioritise interruptible transport into storage during pipeline outages. Such a plan would likely boost storage volumes in Alberta, which we project will end October with its storage gap shrinking to 55 bcf y/y. AECO prices would also be lifted by the protocol, as less gas should be left stranded when it cannot be directed to storage. We project the index will average a basis discount of $1.10/mmbtu in the coming winter, $0.57/mmbtu narrower y/y.
After walking the proverbial plank of y/y declines to this point in 2019, Western Canadian gas production has gone over the edge in August. Our flow sample from the WCSB—which covers overs 90% of the region’s gas output—shows month-to-date August receipts of 13.6 bcf/d, down by 1.0 bcf/d y/y at the lowest monthly average since July 2017. This comes on the heels of an average 0.5 bcf/d y/y decline in the first seven months of the year, to 15.1 bcf/d, for the region.
We project WCSB production will decline through end-2019, with H2 19 averaging a 0.6 decline bcf/d y/y to 15.0 bcf/d. The losses will only be halted in the upcoming heating season due to the low y/y baseline production will be working off (see Fig 1).
We have long forecasted declining output in the WCSB given dwindling capital investment and low prices limiting producers’ interest in incremental production (see Monthly: Canada – Arrested production, 28 November 2018). These factors remain as production continues to plummet. Canada’s rig count has been lower y/y in every week since November 2018. Rigs for the country currently sit at 139, down by 90 y/y. This has rippled through to drilling, with just 392 gas wells drilled in Alberta in H1 19, lower by 87 y/y. Part of the reason for declining capital expenditure is anaemic AECO-C prices. The index has not topped a $2.00/mmbtu cash price since March and has averaged $0.89/mmbtu so far this summer (a $1.57/mmbtu discount to Henry Hub).
Declining WCSB production is only one factor limiting Alberta’s storage injections this summer. Month-to-date daily NGTL injections in August have averaged just 0.25 bcf/d, down by 0.3 bcf/d y/y. The 2019 injection season so far has been lacklustre for Alberta’s inventories, with an average stockbuild of 0.3 bcf/d, which is down by 0.1 bcf/d y/y and 0.4 bcf/d below the province’s five-year average. Alberta is currently the only WCSB province facing a y/y inventory deficit (of 65 bcf), while there are slight y/y surpluses in British Columbia and Saskatchewan (see Monthly: Canada – Wild, wild west, 30 July 2019).
NGTL maintenance remains the elephant in the room with regards to both muted Alberta storage injections and depressed AECO prices. Talks between TC Energy and the major Canadian gas producers advanced throughout the summer, with the sides discussing the potential for production cuts to coincide with pipeline work in order to reduce stranded upstream gas and lift AECO prices (see E-mail alert: Talks of a voluntary gas production cut in Alberta accelerate, 18 July 2019). The process culminated in a vote on 22 August on a compromise proposal that would allow TC Energy to prioritise interruptible delivery into storage during pipe outages in the summers of 2019 and 2020. The vote among Canadian E&Ps saw the proposal rejected by a ratio of 3 to 1. Given the disagreements between E&Ps that were aired when production cuts were being discussed, it is not clear that any new plan would have received a majority of votes.
The AECO September basis contract slumped after the vote, falling by six cents per mmbtu d/d to -$1.25/mmbtu on 22 August. The plan would have likely provided a boost to prices, given some of the volumes stranded upstream of the critical East Gate point would find a way into storage instead. While the initial vote represented a setback to TC Energy, the firm stated in a 26 August filing that it believes it has ‘broad support’ for the service protocol and asked the National Energy Board (NEB) to approve the measure by the end of the month (despite the previous vote against it).
We have upwardly revised our end-October Alberta storage projection to 460 bcf on the potential that the TC Energy plan will be approved by the NEB. While this is still down by 55 bcf y/y, it represents the smallest y/y gap since April 2018, narrower on the prospect for the stranded gas flowing into storage. We project an AECO basis discount of $1.10/mmbtu in the coming winter, $0.57/mmbtu narrower y/y because of the demand that the need to refill storage will create (see Fig 2), given the persistent y/y deficit.
Meanwhile, Eastern Canadian storage remains elevated, with current inventories of 185 bcf, up by 10 bcf y/y. We project that surplus will continue through to an end-October carryout within the 260-270 bcf threshold to ensure healthy stocks for the winter (compared to a 255 bcf end-October 2018 carryout). The continued influx of US gas from Appalachia underpins the rise in Dawn stocks, as the Vector Pipeline has delivered 0.9 bcf/d from Rover into the hub on every day since January. The consistency of US imports into Eastern Canada should reduce Dawn’s reliance on storage and keep the index’s prices in check during the 2019-2020 winter. We project a six cent per mmbtu basis premium on average at Dawn for the coming winter (see E-mail alert: Weekly basis update: Dawn upside will be limited again this winter as Canada swims in US gas, 23 August 2019).
|Fig 1: WCSB gas production, bcf/d||Fig 2: AECO basis vs forecast, $/mmbtu|
|Source: NEB, Energy Aspects||Source: ICE, Energy Aspects|