Life Ain't Easy - Canadian Natural Gas Production Facing Another Year of Decline

Canadian gas production in 2019 turned lower for the first time in half a dozen years as very weak benchmark Canadian gas prices led to a sharp reduction in drilling and wellhead shut-ins. This year, higher prices, more drilling, and greater pipeline egress capacity were supposed to set the stage for a return of supply growth. Instead, production volumes have slipped further due to reduced drilling activity and, more recently, a spate of maintenance work. And even if there is some improvement in the next few months, annual average production looks to be on track for a second consecutive decline in 2020. But what about next year? Today, we take a closer look at the recent supply trends and whether there are any signs pointing to a production rebound in 2021.

Like producers in the Alberta oil sands, the natural gas sector in Western Canada has faced its own share of problems in the past few years: insufficient pipeline egress capacity, crippling disconnects and discounts for the AECO price benchmark, and eroding market share for its gas in the U.S. The April-to-October injection seasons of 2018 and 2019 saw all of these problems reach a fever pitch, with AECO prices slipping to some of the lowest levels on record, including a few instances of negative pricing, driven by the complexities of gas supplies mismatched with the capacity of the pipeline system to deliver those supplies.

This year was supposed to be different — and better. We outlined the reasons why AECO prices and gas supplies were expected to be stronger in 2020 in a number of blogs earlier this year. In Don’t Stop, we delved into capacity expansions on TC Energy’s Alberta pipeline grid, especially along the pipeline corridor known as Upstream of James River (USJR), which delivers most of the unconventional gas supplies to downstream markets. We concluded that this expansion and much-improved pricing for AECO starting late in 2019 and into this year would provide the incentives and pipeline capacity for producers to bring forth more gas in 2020.

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