Storage in Alberta remains on track for a 10-year low end-October carryout of 435 bcf, due to NGTL pipeline maintenance that has hindered summer injections. TC Energy has proposed a new Temporary Service Protocol that it hopes will prioritise access to storage during periods of summer maintenance. The proposal is in response to low AECO prices, as September’s cash price is on track to average a decadal monthly low of $0.38/mmbtu at the index. The new protocol is receiving scrutiny from the Canada Energy Regulator (CER) though, after NGTL shippers rejected the plan. We believe it is unlikely to be enacted this injection season, providing no relief for Alberta’s inventories. The storage situation underpins our forecast for AECO to average a $1.00/mmbtu basis discount in the coming heating season, $0.66/mmbtu narrower y/y. Eastern Canada is awash in gas, with Dawn inventories up by 15 bcf y/y at 230 bcf. There is some danger Dawn will hit its maximum capacity of 279 bcf, though much will depend on when cold weather sets in. We project a winter basis discount of $0.02/mmbtu on the storage surplus, below the current curve’s average of a $0.09/mmbtu premium.
Alberta is on track for its lowest end-October storage carryout in over a decade, with just 435 bcf projected to be in the province’s inventories at the start of the winter. Not only does that represent an 80 bcf y/y deficit over 2018’s previous 10-year low end-October carryout, it would even be lower than 2018’s end-March carryout. Alberta’s storage builds have been so anaemic over the past two injection seasons that it now takes two summers to replenish what one winter depletes. This remains an issue confined to just Alberta, as we project nearby British Columbia will end October with 90 bcf in storage, 15 bcf higher y/y. The storage deficit will be bullish for AECO prices. We project AECO to be at a $1.00/mmbtu discount to Henry Hub in the coming winter, narrower than all but one month’s average since 2017 (February 2019).
September’s sluggish injections of less than 0.1 bcf/d so far are not helping improve the situation, given the five-year average for the month is 0.35 bcf/d. September has also seen the NGTL system record its first daily net withdrawals since May, epitomising Alberta’s difficult keeping inventory volumes up. The most recent withdrawals have coincided with NGTL pipeline and compressor maintenance. Such work is scheduled for every day in September and October, with the disruptions set to restrict the pipeline’s interruptible transport that Alberta uses to send gas into storage.
While September and October’s unceasing capacity restrictions are unprecedented, the overall problem of maintenance choking Western Canadian pipelines is not (see Monthly: Canada -Capacity reduction redux, 22 May 2019). Work has taken offline 0.4 bcf/d in flows to East Gate this summer to date, well above the 0.25 bcf/d that was seen as intrusive in 2018. Tangible benefits to these upgrades and repairs have been slow to materialise. Unrestricted capacity through East Gate—where Alberta gas transits either further east to Dawn or crosses the border heading to the US Midwest—has only risen by 0.1 bcf/d since April 2018.
The East Gate restrictions in September have crippled AECO cash prices, which have averaged a decadal low of just $0.38/mmbtu so far this month. If that record holds, it will be the third time in 2019 that AECO has set a new monthly 10-year cash price low, after April ($0.68/mmbtuMMBtu) and June ($0.46/mmbtu) featured similarly overbearing maintenance. The low prices have spurred action from NGTL operator TC Energy, which has proposed a new Temporary Service Protocol to alleviate low prices in times of heavy maintenance between April and October. The new protocol would move to restrict upstream receipt services first during pipeline work, before being applied to downstream East Gate delivery services. TC Energy said the proposal would allow it to prioritise access to storage during summer upgrades, providing an additional market for WCSB gas.
TC Energy originally hoped to institute the Temporary Service Protocol on 1 September, but CER has yet to give the plan its approval. CER provided a list of questions for TC Energy to consider in advance of a hearing scheduled for 25 September on the issue. One of the main concerns CER noted was the disapproval from NGTL shippers regarding the plan—the shippers voted against the protocol by a ratio of 3:1 in late August (see Monthly: Canada – Midsummer madness, 27 August 2019). CER also wrote that TC Energy would need to address whether its goals were to enhance system reliability and promote market efficiencies, or if it was directly focussed on supporting AECO prices. Given the deliberation CER is employing with regards to the Protocol, and that it would only apply until end-October, we feel it is unlikely a response will come before the close of the current injection season.
We project AECO prices will find support from the continued storage deficit. Our forecast calls for an average $1.00/mmbtu basis discount from AECO to Henry Hub in the coming heating season, $0.66/mmbtu narrower y/y. The current forward curve sits at a $0.94/mmbtu discount for the coming winter. Our forecast incorporates not just low inventory levels, but also sluggish WCSB production undercutting available supplies. Output from the region is down by 0.6 bcf/d y/y so far in the injection season at 14.8 bcf/d, and we project this winter will see a further 0.1 bcf/d in y/y declines. The winter production declines only look mild by comparison y/y, as the start of the current trend of continuous y/y declines began in the 2018-19 heating season.
Meanwhile, we project Eastern Canada will enter the heating season with a storage carryout north of 270 bcf, well above the 260 bcf considered sufficient for winter inventories. Indeed, Dawn is at some risk of hitting its absolute maximum capacity of 279 bcf before the winter cold sets in. Dawn currently holds stocks of 230 bcf (+15 bcf y/y) and would need to inject 1.0 bcf/d through the end of October to hit that maximum capacity. Weather is likely to play a critical role in determining if inventories approach their upper limit. Last year, early cold in Ontario saw October builds of just 0.4 bcf/d at Dawn, which would provide some breathing room against tank tops. Still, in three of the past four years, injections at Dawn continued into the second week of November, which would add volumes on top of our projected 270+ bcf end-October carryout.
Should Dawn continue injecting when storage is above 270 bcf, prices at the hub are likely to collapse. The forward curve is pricing in some risk of storage filling, with the Oct-19 contract currently trading at a $0.45/mmbtu discount to Henry Hub. This would be the lowest monthly average basis price on record, nearly double the current low of $0.24/mmbtu from May 2019. Current cash prices are also trending downward on the continued storage surplus, with September averaging a month-to-date discount of $0.32/mmbtu.
Still, the current forward curve maintains a 2019-20 heating season premium at Dawn of $0.09/mmbtu. This is compared to flat pricing over the course of last winter, when both Dawn and Henry Hub averaged $3.37/mmbtu. Our projection for winter pricing at Dawn is below the curve due to the fullness of inventories. We project a $0.02/mmbtu discount at Dawn for the heating season, though much will depend on the intensity of cold during Canada’s winter.
|Fig 1: Alberta end-season carryouts, bcf||Fig 2: Dawn storage y/y (bcf), basis ($/mmbtu)|
|Source: NEB, Energy Aspects||Source: Bloomberg, Refinitiv, Energy Aspects|