Imagine that the neighbours hold an epic summer bash, but you’re not invited.
That’s the sense some natural gas producers in Western Canada must be feeling these days.
Natural gas prices are sizzling south of the border, with benchmark U.S. spot rates climbing by about seven per cent on Tuesday to reach a 14-year high.
On Monday, U.S. benchmark prices closed at US$9.03 per thousand cubic feet (mcf).
In Alberta, the AECO natural gas spot price closed at US$2.75.
That’s a punishing $6.28 differential compared with gas sold in the U.S., according to ATB Capital Markets — and prices are much, much higher overseas.
Any way you slice it, prices globally are soaring as demand increases, yet in recent weeks, Western Canadian operators have been left on the sidelines.
“Producers are not getting paid as much as they should, given where natural gas prices are for North America . . . I don’t even want to guess how much royalty revenue has been lost because of this,” said Phil Hodge, CEO of Calgary-based Pine Cliff Energy.
“It is frustrating, very frustrating,”
Western Canadian natural gas producers are used to seeing volatility and a discount at the key Alberta hub relative to American markets in recent years.
The differential between the U.S. Henry Hub in Louisiana and Alberta’s AECO price narrowed earlier this year, but has come back with a vengeance this summer.
Companies and analysts are citing familiar issues for its unwelcome return: a lack of available pipeline capacity in the region, summer maintenance work on existing transportation networks and rising output in Western Canada.
“It’s just 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.
Global natural gas prices have taken off in the past year, fuelled by an economic rebound as pandemic restrictions eased and then Russia’s invasion of Ukraine. The energy crisis unfolding in Europe and surging demand for liquefied natural gas (LNG) have propelled markets higher.
European prices were near record levels on Tuesday; prices in the U.S. are up 150 per cent this year for the front-month contract, according to Reuters.
In Western Canada, gas prices have also been relatively strong this year, with the AECO spot price sitting above US$6 per mcf in early May.
However, the discount between spot prices in Alberta and the U.S. have widened in recent weeks, from US$1.56 per mcf at the beginning of July to more than $6 earlier this week.
Analyst Jeremy McCrea of Raymond James said that typically, the price differential should be between 75 cents and $1 per mcf to account for transportation costs to ship Alberta gas to the U.S. Gulf Coast.
“Now it is just hitting astronomical proportions,” McCrea said of the discount.
“Just when the 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 aren’t able to.”
Natural gas production in Western Canada has been climbing this year, averaging about 17.4 billion cubic feet of production per day this month, up one bcf per day from a year earlier, noted Martin King, a senior analyst at RBN Energy in Calgary.
That increase is putting pressure on the existing pipeline network.
“The end result is more supply than the market can handle, and you’re seeing prices come down,” he said.
Some gas producers have grown exasperated with the volatility in AECO pricing in recent years and have increased their transportation options by inking deals to ship gas into other markets.
“The larger producers generally have diversified away from this market because they knew it was subject to these types of disconnections,” said Gee.
“What’s it going to take to reconnect it? Hopefully, LNG Canada and West Coast LNG exports help.”
But the deep discount will cost Alberta taxpayers as royalties are based on the sale price of the commodity. King conservatively estimates lost industry revenue because of wide discounts at more than $1 billion per month for July and August.
All parties — including the province, regulators, pipeline firms and gas producers — need to sit down and find a way to solve the issue, said Tristan Goodman, president of the Explorers and Producers Association of Canada.
“We’re less concerned about how it gets fixed, but it needs to get rectified,” he said.
In past 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 periods of summer maintenance.
Some point out the province helped reach an agreement in 2019 that ensured gas could get into storage during such times, although the temporary protocol has since expired.
Alberta Associate Natural Gas Minister Dale Nally wasn’t available for an interview, but said in a statement the government will monitor the situation and “respond appropriately.”
Officials with TC Energy said total deliveries on the NGTL network increased by nine per cent in the second quarter from last year and noted there’s been storage access over the summer.
TC Energy will earmark $5.8 billion in capital to NGTL by 2024, including for system expansions. Projects underway 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 believe we should sell any incremental gas into the AECO markets. We’re going to try to avoid that for several years because the system doesn’t work adequately,” he said.
“The Alberta government, and more acutely the Alberta taxpayers, should be deeply troubled by what’s 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 Calgary Herald columnist.
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