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I Can't Help Myself - Why Western Canada's Natural Gas Production Has Been Hitting Multi-Year Highs

With natural gas prices reaching levels not seen in seven years, Western Canada is doing all it can to help increase gas supply, with recent data showing monthly production hitting multi-year highs. Moreover, Canadian forward gas prices are at the highest levels since 2014, gas pipeline expansions are in place or being constructed to accommodate future supply expansion, and gas-focused drilling activity remains strong — all of which may as well be a prescription for sending gas production to record levels later this year and in 2022. In today’s RBN blog, we provide an update on the recent gas production growth in Alberta and neighboring provinces and why more growth is coming.

Western Canada’s natural gas production continues to play an important role in the North American market. Nearly half of Canada’s output is exported to its neighbor to the south and that supply has helped to backstop a U.S. market that would otherwise be even tighter than it currently is given the enormous pull of U.S. gas to Mexico and LNG export docks. Importantly for this year’s — and probably next year’s — gas market balance, Western Canadian gas production growth has been strong this year and may be on track to chalk up one of its biggest annual supply gains in 20 years.

Only a year ago, in Life Ain’t Easy, we were discussing a very different outlook for Canadian gas production. For a good part of 2020, supplies had tracked lower, first in response to the short-lived OPEC-Russia price war, which undercut producer spending on all things related to oil and gas supply, and later the COVID-19 pandemic-related disruptions that limited the availability and mobility of rig crews. Additionally, the pandemic’s impact on North American and global gas demand led to the temporary oversupply of gas in the U.S. as LNG exports dropped off sharply through the summer due to weak European and Asian demand. It was the perfect combination of events to keep natural gas prices low and undermine production on both sides of the U.S.-Canada border. In the end, Canadian gas production fell by a modest 0.32 Bcf/d (-2.0%) in 2020 to 15.4 Bcf/d (red column in Figure 1), on average, but it was the second consecutive year of decline. In 2019 output fell 0.38 Bcf/d (-2.3%) on the back of extreme weakness in the Canadian AECO price benchmark. Worse, the combined supply loss from 2019 and 2020 effectively unwound the record gains made in 2018 (+0.72 Bcf/d).

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