SnapChart – Are the Choppy Gas Price Waters Behind US?

This week’s SnapChart compares US natural gas price – measured at Louisiana’s Henry Hub – to Western Canada’s AECO price.  

Alberta’s price has been choppy and weak compared to US pricing, especially outside of the higher demand winter months. Low-demand ‘shoulder season’ prices have averaged near $C 1.00/GJ or a 70 percent discount to the United States over the past few years.  At these low prices most Canadian dry gas producers cannot cover their cash costs, including services for keeping wells operating, processing costs and transportation tolls.

The extreme volatility in AECO-hub pricing started in 2017 and was caused by three factors; (1) a change in the policy for operating Western Canada’s dominant regional gas gathering system during maintenance periods; (2) a restricted ability for gas to flow into storage facilities;  and, (3) a surge of volume growth that created a glut on the system.

Because of choppy and weak prices, the Alberta Government formed an expert panel to help understand the issues. In November 2018, the panel published 48 recommendations in a report titled “Roadmap to Recovery: Reviving Alberta’s Natural Gas Industry.”

The report’s seventh recommendation addressed the problematic maintenance policy on the regional gas system that was introduced in 2017, and the storage access issues — the root causes of the price volatility. Ten months later, with broad support for the change from the Alberta Government, Western Canadian producers and TC Energy (the pipeline owner), the Canadian Energy Regulator (CER) recently approved these changes.

The CER approved the change for October of 2019 and next summer; it should lead to more stable Western Canadian natural gas pricing as a consequence. In fact, already in the first few days of the new policy, AECO gas prices have improved and storage caverns – that were at 13-year lows because of restricted access – have started to fill. For more information on the changes for Western Canadian natural gas markets and how prices have reacted in the early days of the new procedures, tune into the ARC Energy Ideas podcast “Positive Developments for Western Canada Oil and Gas.”