Storage volumes can be blocked
AECO spot trading at a significant discount to the winter band
AECO spot prices are well below the winter band compared to the same period last year, prompting traders to inject natural gas into storage, but if Canadian production continues to increase, this could result in blocked volumes during the heating season.
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Given AECO’s weak liquidity over the past two months, there has been an incentive to buy gas now for injection in order to exit later this winter. Over the past month, AECO’s cash averaged $ 3.04 / MMBtu, for an average discount of 75 cents on the winter band. That’s about 50% wider than the cash flow-to-winter spread of last summer, which was wide enough to drive record injections throughout the summer.
The problem with injecting now for withdrawal this winter is that the market is anticipating a significant discount for AECO. He seems to expect pipeline systems to be constrained, possibly due to the potential increase in production by operators, according to S&P Global Platts Analytics.
If producers fill the upstream portion of the James River of the Nova Gas Transmission Ltd. pipeline system with volumes this winter, any gas injected into the fields of this part of the network could be blocked. If producers fill USJR to capacity this winter, storage volumes in the eastern gate could also be blocked, as NGTL will likely limit access to storage here too if production increases too much.
The east gate is well above its declared capacity since Sept. 3, averaging 4.7 Bcf / d, just over 100 MMcf / d more than NGTL’s capacity in its daily operating plan, according to data from Platts Analytics. This would imply that the system is constrained. NGTL partially manages the constraints by cutting off access to storage in the east gate.
Heavy injections around the eastern gate could mean strong withdrawals this winter, which could clog NGTL’s network and cause stress weakness at AECO.
Many factors point to continued production growth in Western Canada this winter. The associated gas production and gas demand in Alberta could be supported in the coming months with the entry into service of the Enbridge Line 3 replacement on October 3. Concurrent with the start-up of Line 3, the Southern Access pipeline will grow from 996,000 bpd to 1.2 million bpd, providing additional throughput in the Enbridge system from Superior, Wisconsin, to Pontiac, Illinois.
The pipeline will keep Canadian crude spreads under solid economic conditions and come into service at a good time, as crude and condensate supply will reach new highs of 5 million bpd by the end of the year. year, against 4.6 million bpd in September, with strong production of sands and a recovery of shales supported by a solid number of drilling platforms.
With WTI at $ 75 / bbl recently, that could spur more liquid-rich oil drilling this winter as producers look to take advantage of the high price. This could lead to an increase in the associated and wet gas supply, some of which would end up on the NGTL system and could be part of stress concerns this winter.
One of the largest Canadian operators has announced plans to step up production in the coming months. On September 22, Tourmaline revised its production forecast for this year and for 2022. In May, the company said it expected average production of 405,000 to 420,000 boe / d in 2021 and 2022 production of 440. 000 boe / d on average. Its most recent report, however, shows expected production for 2021 at 440,000-445,000 boe / d, and 2022 production at 500,000-510,000 boe / d.
These substantial increases are in addition to the fact that the company is moving a significant amount of drilling activity from 2022 into the latter part of 2021. Although the company says this is due to the efficiency gains in drilling and the desire to hang on to its drilling fleet rather than release them and then bring them back in 2022, the urge to complete the wells sooner could be strong.
Henry Hub continued to rally and the Winter Band is trading above $ 6 / MMBtu. So even if constraint-driven prices arise for AECO this winter, as the market demands, production yields this winter could be the highest in years.