Western Canadian natural gas prices have been stuck at historically weak levels since summer due to prolonged pipeline maintenance, which will hurt producers’ quarterly profits and royalties paid to the cash-strapped province of Alberta.
In the Alberta market, known as AECO, spot natural gas prices for immediate delivery have turned negative eight times in the last three months, most recently on Oct. 9, meaning producers got nothing for gas sold on those days.
Throughout the third quarter of 2017 AECO spot prices fluctuated wildly, averaging around C$1.36 a gigajoule, down from C$2.05 a gigajoule or roughly a third on the whole of 2016, also a weak year.
One reason is hefty maintenance and expansion work on TransCanada Corp’s NOVA Gas Transmission Ltd (NGTL) pipeline system that has resulted in more severe capacity outages than market players expected and hindered gas flow across western Canada.
“In August, September and October we have seen these wild swings and the price has gone ridiculously low. It’s literally unprecedented,” said GMP FirstEnergy analyst Martin King, who has tracked Canadian gas prices since 1993.
Encana Corp and Kelt Exploration Ltd have shut in some natural gas production because of the maintenance work and weak prices.
BMO Capital Markets this week downgraded their trading recommendations on Tourmaline Oil Corp , Peyto Exploration and Development , Advantage Oil & Gas Ltd and Paramount Resources Ltd to “market perform” from “outperform” because of exposure to AECO prices.
Weak prices will also affect the royalties gas producers pay to the province of Alberta, which are based on AECO spot prices and contributed C$520 million to the province’s coffers last fiscal year, about 1.2 percent of revenues.
The Alberta government last updated its 2017-18 natural gas price forecast in August to C$2.60 a gigajoule, down 30 cents from its original budget estimate. A weaker gas price this year could deepen Alberta’s expected C$10.5 billion deficit.
“This is a bigger issue than oil and gas companies getting smaller profits, it’s less money going into the hands of the province,” GMP FirstEnergy’s King said.
Alberta Treasury Board and Finance spokesman Mike Berezowsky said if needed the gas price forecast would be revised in the November budget update.
Price swings have been accentuated by the maintenance limiting access to gas storage facilities, leaving producers no option but to shut in production or send gas to the AECO market hub, where it has bottlenecked.
“The market does not have the shock absorber of storage,” said ARC Financial analyst Jackie Forrest.
TransCanada spokeswoman Ruth Anne Beck said the company had met most of its firm service commitments recently and it told customers about expansion and maintenance plans early and often to minimize impact on production and gas flows.
Once the maintenance is complete capacity on the northwest part of the NGTL system will increase by 700 million cubic feet a day, adding 6 percent to the entire network and helping alleviate the bottleneck.
However BMO analysts expect prices to remain under pressure as western Canadian production grows from 15.8 billion cubic feet a day (Bcf/d)in 2017 to 18.7 Bcf/d in 2019.
“The resulting structural imbalance could place downward pressure on Western Canadian natural gas prices through 2019,” analyst Randy Ollenberger said in a note.
(Reporting by Nia Williams; Editing by Susan Thomas)