Production risks, stronger storage injections might lead to tighter AECO market

Denver — The AECO hub could see higher prices in coming months as producers look to rely on well completions to sustain production amid low Western Canadian storage levels.

Weak drilling in Western Canada over the past year has led S&P Global Platts Analytics to project that if operators do not rely upon drilled-but-uncompleted wells, production could stall in 2020 to levels considerably below its current forecast of 16.2 Bcf/d by year's end. It is currently at 15.3 Bcf/d.

The British Columbia portion of the Montney Shale has been the key driver of gas production growth in Western Canada over the past few years. Producers drawing from an inventory of DUC wells have played a key role in this growth and likely will going forward.

Gas production out of the BC Montney has grown sharply in recent years. Production averaged 4.2 Bcf/d in 2019, which accounts for 38% of all production in Western Canada. This is more than double the 2011 average of 1.7 Bcf/d, when it accounted for just 14% of production in the region.

However, Platts Analytics is forecasting strong production is needed to help balance the AECO market through next summer, but the DUC drawdown will have to significantly ramp up beyond recent rates if the BC Montney is to supply this growth.

Even the recent jump to 70 active gas-focused rigs in Western Canada, up from 50 over the past 12 weeks, is unlikely to boost the projections. Platt Analytics' forecasts account for seasonal fluctuations and include the assumption of an increase in rig activity at this point of the winter.

About 300 DUCs need to be completed in 2020 to meet Platts Analytics' current forecast, which would be well above historical norms. For example, 2018 saw the highest DUC drawdown since 2013 at about 200 completed DUCs. Even if 2018's record drawdown year is repeated again in 2020, production would still come in 0.6 Bcf/d lower than the current forecast.

While West Canada production typically falls in the summer months, the North Montney Mainline is slated to go online by this summer and add 1.5 Bcf/d of production capacity, so a surge is more likely this summer than most.

Still, 300 DUC completions would be a 50% increase over 2018's record drawdown, suggesting Platts Analytics' summer 2020 forecast might err on the high side.

Platts Analytics' forecast for Western Canada next summer indicates at these likely production levels, AECO may considerably tighten to enable what is expected to be a summer of multiyear-high injections. This is due to Nova Gas Transmission Pipeline amending its tariff to allow for more injections this summer.

Storage inventories are currently at a decade low, and Western Canada's injections could be twice as strong this summer compared to last. Strong injections coupled with the likely inability of DUCs to meet this demand has Platts Analytics anticipating AECO summer prices could reach multiyear highs.