Money, Money, Money - Canadian Gas Producers Pivoting Toward Greater LNG Price Exposure

For the past several years, Western Canada’s natural gas producers have been forced to sit on the sidelines of too many broader price rallies as their main benchmark, AECO, languished at painfully low levels. Though an increasing number of producers have been steadily diversifying their price exposure away from Western Canada and AECO, even greater pricing upside might be captured if marketing arrangements could be developed to access higher international LNG prices via U.S. Gulf Coast terminals. In today’s RBN blog, we look at the steps that two of Canada’s largest natural gas producers have taken to capture that LNG price upside.

AECO, Western Canada’s premier gas price benchmark — sometimes referred to as the Henry Hub of the North — has seen more than its fair share of pricing troubles in recent years. Various pipeline congestion issues, largely inside Alberta, the region’s largest energy-producing province, have often squeezed the AECO market during the summer months, resulting in painfully low prices for extended periods of time. We discussed the latest round of these congestion-driven price crashes in Too Low for Zero back in late August.

It was also usually the case that as AECO was crashing and subsequently languishing at very low levels, natural gas prices in other parts of North America — often right on Western Canada’s doorstep at its export trading hubs — were many multiples higher as congestion issues outside of Alberta (and its neighboring province of British Columbia) were absent. The end result was periods of extreme price volatility, periods of very low prices (dashed black ovals in left graph in Figure 1), and immense discounts to other price benchmarks such as the Henry Hub (right graph). Even when the Canadian gas market temporarily shifted into overdrive at the height of Winter Storm Elliott around Christmas, with record-high storage withdrawals and exports to its grateful U.S. neighbor (see Out of This World), AECO gas prices, though higher on cold weather in the region, barely registered a ripple from the storm’s passing (dashed red oval in left graph) and the chaos it wrought on other parts of North America that temporarily experienced much higher prices.