Western Canadian natural gas producers have long battled unrelenting competition from growing shale gas supply in the U.S. But recent price action at AECO — Canada’s benchmark natural gas hub in Alberta — suggests market conditions there have gone from bad to worse. AECO prices in recent months have fallen to the lowest levels in more than a decade, even dropping below zero at one point in intraday trading this fall. Fundamentals are increasingly bearish, given that Canadian gas production has rebounded to the highest level in close to 10 years, storage there is near to five-year highs and exports are facing further cutbacks as U.S. gas supply is itself at record highs. In addition, producers are contending with a number of transportation issues closer to home. Today, we begin a look at the factors affecting the Western Canadian gas market.
Ever since the start of the Shale Revolution, Western Canadian gas producers have weathered numerous challenges to their ability to grow supply and increase — or even maintain — market share in the U.S., something we’ve discussed in detail in the RBN blogosphere. No event has been more impactful in that respect than the explosive rise of Marcellus/Utica gas production — and as a result, the rejiggering of gas price relationships and flow patterns in the U.S. Northeast — which has eroded Alberta gas producers’ traditional markets in Ontario, Quebec and the U.S. Midwest and Northeast (see Return to Sender and One Way Or Another).
To remain competitive and hold on to market share in the U.S., prices at the AECO trading hub in Alberta have had to come down in tandem with the corresponding supply hubs in the Marcellus/Utica region and other competing supply sources in the Rockies and Midcontinent. For some years, that, along with growing domestic gas demand from gas-fired power generation and oil sands development, has helped stabilize exports to the U.S. and keep prices steady. However, more recently, Alberta prices have taken a beating, indicating producers are facing fresh challenges in the region (see Figure 1 below).