The Alberta natural gas market in Western Canada is in the midst of a seismic shift. Regional gas supply growth is accelerating. At the same time, export demand is eroding, but domestic demand — particularly from gas-fired power generation and oil-sands development — is on the rise. The incremental production along with the move toward intra-provincial demand has reconfigured flows and strained TransCanada’s infrastructure in the region. These factors resulted in extreme price volatility this past fall, a dynamic that’s likely to resurface in the New Year during low-demand times. Today, we continue our analysis of the Western Canadian gas market with a look at the changing transportation and flow dynamics in Alberta.
This blog continues our series on recent developments in the Western Canadian gas market. As we discussed in Part 1, natural gas prices at AECO — the national benchmark trading hub in Alberta — experienced extreme volatility this fall, swinging wildly from one day to the next, trading for less than zero at one point and settling at 10-year lows — all indications of severe constraints. On a macro level, some of the price weakness can be attributed to an overall bearish supply-demand balance. Canadian gas production this year has averaged 15.5 Bcf/d, which is the highest annual average since 2008. Some of that incremental supply is being absorbed by intra-provincial demand growth from two sectors: power generation and oil-sands production (see Stayin’ Alive). On the other hand, exports to the U.S. — the other major demand source for Canadian producers — have been down year-on-year, and storage reflected oversupply conditions, with the inventory climbing to more than 90% of capacity this fall.
But, as we noted in Part 2, the problem is not just that production is growing, it’s that the supply growth is all coming from the same producing area in eastern Alberta — an area that has limited and increasingly constrained transportation options for moving the gas to market. As we pointed out in the last episode, when it comes to connecting growing supply to the oil sands and other demand markets, producers primarily rely on TransCanada’s Nova Gas Transmission Ltd. (NGTL) to gather and transport the gas. The system as a whole picks up more than 12 Bcf/d in Alberta, or nearly 80% of total Canadian gas production. But the bulk of the supply receipts (about 85% of that 12 Bcf/d) really hits NGTL along a subsection of the system — the Upstream of James River (USJR) receipt area located north of the James River along the British Columbia-Alberta border (see map in Part 2 for reference). So, understanding the extent of the congestion requires homing in on the capacity and gas flows in this particular section of the pipe, as shown in Figure 1 below.