Commentary – Natural Gas Pipeline Crunch – An Early Warning Sign
Source: www.dreamstime.com © Ryjkov
When a patient gets a diagnosis – such as high cholesterol – it is an early warning sign that they should take proactive measures to reduce the chances of getting a blockage. Likewise, the temporary crunch in Western Canada’s regional natural gas pipeline system is an early indicator that these energy arteries should not be ignored.
In Western Canada, any mention of a lack of pipeline space immediately calls to mind the need for new oil export pipelines, such as the Keystone XL. In contrast, Western Canada’s natural gas production has declined about 15% since peaking in 2007, and conversations around natural gas pipelines tend to focus on the topic of excess capacity, not shortages.
While at the macro level Western Canada has a surplus of natural gas pipeline capacity, regional volume constraints are starting to emerge. Between 2009 and 2014, Western Canadian shale gas grew by about 4 Bcf/d. Most of the new supply came from the Montney play that centers on Grande Prairie and extends into northeast British Columbia. The concentrated growth from the Montney region is starting test the pipeline limits in the local area.
The issue became acute this spring, when TransCanada downgraded the capacity of some pipes on the NOVA Gas system to address safety issues. At the same time, other pipelines ̶ the Spectra Energy West Coast System and the Alliance pipeline ̶ started their seasonal maintenance cycles that also removed capacity.
As a result of concurrent outages, over the past three months Western Canadian natural gas production has been curtailed between 0.5 to over 1 Bcf/d. The lost supply is equal to approximately $C 40 to $C 80 million per month of lost revenue for the industry.
Producers with firm service commitments on the pipelines have generally not been impacted. But for producers relying on intermittent access, the issue has caused production outages and price discounts. Yesterday for example, the morning spot price at Alliance CREC – a pricing hub that is centered in the Montney region – averaged negative $C 2.10/GJ. In case you missed it, producers were paying $C 2.10/GJ for a buyer to take their gas!
Why would a producer pay for someone to take away their natural gas? That’s not a sustainable business model taught in MBA schools. For some producers, it is because of operational constraints that require them to move the gas. Another reason is oil producers with natural gas in their well streams that must move their natural gas if they want to sell their crude oil (historically the gas would have just been flared, but today’s strict limits on flaring restrict this practice).
According to pipeline company outage forecasts, the repair work should be wrapped up by November of this year. At that point, most of the capacity will be returned and the price discounts and production shut-ins would end.
When medical symptoms go away, patients often go back to the old habits. Although the pressure will ease, future issues could still develop. Even though Western Canadian drilling and investment has been reduced this year, the activity levels in the shale gas region have held up better than other places and more production growth is still possible from high-graded plays. By mid-2017, TransCanada plans to expand the pipeline system in the Montney region, and this should help to reduce the possibility of future arterial blockages. Or at least in theory. Some of this new space will be consumed when stranded natural gas wells from the northern Montney region are completed and connected into the pipeline system in 2018.
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Preventative medicine is important: Today’s painful situation highlights the importance of locking in pipeline capacity for natural gas, because excess pipeline capacity cannot be taken for granted.
