Canadian oil and natural gas producers were dancing very much to the same tune as their U.S. counterparts in 2019: reduce capital spending, live within cash flow and improve returns to investors. The only major difference for Canadian gas producers is that they were forced to dance even faster due to abysmal natural gas pricing during the summer of 2019, which cast a very negative pall over the whole sector for the remainder of last year. Although the focus on spending restraint, cash flow and returns has not changed for these producers upon entering 2020, there are encouraging signals that Canadian gas pricing will be materially improved this year, especially during the summer months, supporting higher cash flows and a cautious expansion in capital spending. Today, we examine the drivers behind what might increase capital spending by gas producers and lead to an increase in supplies.
Gas-focused natural gas producers in Canada have had a tough time of it the past few years. They’ve weathered insufficient pipeline egress from Western Canada, shrinking market share in the U.S., procedural changes by the Western Canadian Sedimentary Basin’s (WSCB) largest gas pipeline operator that created market imbalances, and prices in 2019 that averaged the lowest on record in June (and were pretty ugly that whole summer). No, it has not been pretty, and the end result, after many years of growth, was a pullback in Western Canadian natural gas supplies in 2019 as a whole, marking the first decline since 2012.
Although Western Canada natural gas prices had been on a downtrend for several years and had a far worse time of it in summer 2019 than did prices in the U.S., supplies from the WCSB had been steadily expanding since 2012 — that is, until last year. We explained a number of the reasons behind the prior years’ supply increases in Part 1 of this series; in short, the gains were driven by natural gas liquids-focused drilling in the unconventional plays, which was propelled by attractive economics and was relatively impervious to low gas prices even though the same wells also yield high volumes of dry gas. This associated gas production has been primarily concentrated in areas served by TC Energy’s Nova Gas Transmission pipeline system, the largest gas pipeline system in Western Canada, which carries ~80% of all the gas supply in the region. More specifically, we zeroed in on those supplies that are moved on a major pipeline corridor of the Nova system referred to as Upstream James River (USJR), the primary conduit for supplies out of the unconventional gas plays such as the Montney and Duvernay. For easier reference, we’ve included the map from Part 1 again here in Figure 1, with Nova’s USJR corridor delineated by the yellow lines within the dashed blue oval.
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