Canadian producers hit again by AECO disconnection
Around the world, natural gas prices are reaching new highs due to the European energy crisis and Russian aggression in Ukraine, which is everywhere except Canada.
Structural problems on TC Energy’s Nova Gas Transmission Limited (NGTL) system, which transports the vast majority of natural gas produced in Western Canada, have again devastated prices at the main AECO trading center in Alberta as NGTL s is working to complete its ambitious 2021 expansion program.
On September 9, as the Henry Hub price in the United States approached a record high of $10/mnBtu, the spot price at AECO was only a little above $5/GJ – or below $4/mnBtu with exchange rate and GJ conversion. at mnBtu taken into account.
“Over the past two weeks, we have again seen the AECO market disconnect sharply from the rest of North America, with the differential with NYMEX reaching an all-time high of $9.50,” wrote Darren Gee, CEO of the producer of Deep Basin Peyto Exploration & Development. in his september 4th President’s report. “This disconnect is primarily caused by a highly inefficient system that uses price as a mechanism to force volume out of the NGTL system when maintenance or expansion limits capacity.”
But AECO producers on the NGTL system aren’t the only ones affected by the maintenance. On Spectra Energy‘s T-South system in British Columbia, the spot price on September 9 crashed to just C$0.15/GJ.
The combination of the two system problems forced Kelt Exploration, a major Montney producer, to shut down “significant” gas volumes in British Columbia and Alberta on “certain days” in late August.
“Beginning in the third week of August 2022, AECO and Station 2 daily spot prices dropped significantly due to pipeline maintenance on the NGTL and T-South systems, from an unplanned compressor outage in Alberta and restrictions on gas storage injections,” Kelt said. September 12.
AECO prices have recovered somewhat since late August, Kelt said, but he warned that prices could remain volatile through September and October as NGTL maintenance is completed. Prices on T-South, he said, should normalize once maintenance is complete later this week.
Tourmaline Oil, Canada’s largest natural gas producer, has also been hit by NGTL’s troubles, it said in a Sept. 12 market update.
“Due to maintenance of the Alberta/BC pipeline and related natural gas price collapse at AECO and Station 2 in the second half of August, Tourmaline shut down approximately 100 million feet3/day of existing production and delayed the start of several new pads from August to September/October 2022,” he said.
Pricing issues at AECO during summer maintenance periods have persisted for several years, prompting many producers to diversify their marketing efforts away from the Alberta hub in favor of less stressed hubs in Eastern Canada and the American Pacific Northwest.
Peyto, for example, is only required to close small volumes – about 2,000 barrels of oil equivalent (boe)/day, or about 11,000 feet3/day – to maintain operational flexibility when AECO collapses. More than half of its 500mn ft3/day of production is marketed on the basis of Henry Hub prices.
In response to AECO’s issues, Tourmaline said it continues to strategically hedge some of its production: approximately 26% of its 2023 production is hedged at C$5.25/’000 ft.3while about 110mn ft3/day was hedged at a basis differential to NYMEX of $0.12/’000ft3.
It also benefits from its exposure to the Malin hub in Oregon and the PG&E Citygate hub in California, where the majority of its volumes are unhedged to take advantage of winter (November to April) staggered pricing of $8.35/ mnBtu and 9.07 USD/mnBtu. , respectively.
Tourmaline is also connected to global LNG markets through a supply agreement with Cheniere Energy covering approximately 140 million feet.3/day of production which starts on January 1, 2023. About 20mn ft3/day of this volume was hedged against the Japan Korea Marker (JKM) price during each of the April to October periods in 2023 and 2024. On September 6, the 2023 JKM strip averaged 50, 46 USD/minBtu.