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

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.

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.

Unlike most natural gas producing jurisdictions in North America facing a pullback in drilling and capital spending, producers in Western Canada appear to be doing the opposite and lining up for a year of rising production, higher average prices and additional pipeline capacity from producing basins. In short, 2020 should be a year in which supplies in the region mount a comeback after the dismal down year for supplies — and prices — that characterized 2019. A good part of that supply and pipeline capacity growth optimism has to do with a major pipeline expansion out of the Montney Basin in northeastern British Columbia that just recently entered service. Dubbed the North Montney Mainline and operated by Canada’s largest gas pipeline company, TC Energy, this vital piece of new pipeline egress from one of the most prolific unconventional gas basins in North America is setting up Western Canadian gas supplies for recovery in 2020 and beyond. Today, we continue our series with a look at what this may portend for gas supplies this year.