ANALYSIS: Price spreads support higher Canadian gas exports to US this injection season

New York — Current price spreads make the US Midwest an attractive target for Canadian natural gas exports entering the upcoming injection season, but stronger Bakken shale production due to new infrastructure and higher gas-to-oil ratios could keep a lid on imports.

S&P Global Platts Analytics is forecasting strong exports to the Midwest from Western Canada and weak injections this summer based on current spreads. However, Western Canada may need the gas to inject just as much as the US Midwest does. This might lead AECO hub prices to drive Chicago prices at times. Also, AECO could trade considerably closer to Chicago this summer than spreads currently indicate.

Platts Analytics expects Western Canada storage fields will inject about 700 MMcf/d this summer and export 3.7 Bcf/d to the US Midwest based on current spreads. The figure is based on combined pipeline flows of 1.5 Bcf/d on Alliance, 800 MMcf/d on Northern Border, 200 MMcf/d on Viking and 1.3 Bcf/d on Great Lakes.

Great Lakes exported 1.15 Bcf/d last summer, and there is an additional 275 MMcf/d contracted for export this summer. Platts Analytics is forecasting these extra contracts, combined with current spreads, will drive strong exports on Great Lakes, but at the expense of local storage.

With contracts to export on Great Lakes higher this summer, and negligible variable costs to do so, AECO may need to price closer to Chicago than the 55 cent/MMBtu discount shown in current summer strips in order to fight for supply. Platts Analytics expects AECO may be more in the 25 to 35 cent discount to Chicago range this summer.

If Western Canada injected back to the five-year average, it would cut exports to the Midwest by about 200 MMcf/d. There could be even more upside to this number, as 523 Bcf might actually be a more accurate "five-year average" for Western Canada, considering today's five-year average includes the summers of 2018 and 2019 when injections were restricted due to NGTL maintenance. Injecting to 523 Bcf would cut an additional 150 MMcf/d off Midwest exports, according to Platts Analytics.

As much as Western Canada needs the gas, Platts Analytics expects the Midwest will need the gas just as much. Inflows to the Midwest from Oklahoma and the Rockies are expected to fall by 1.1 Bcf/d and 350 MMcf/d, respectively, and AECO could be the marginal molecule into Chicago this summer.

However, stronger-than-expected Bakken shale production could push back on Canadian exports this summer. Platts Analytics expects production to decline 200 to 300 MMcf/d from current levels to allow AECO to send 800 MMcf/d to Northern Border Pipeline this summer, up from 500 to 600 MMcf/d currently.

But Bakken production has been defying expectations since the fall, when spring 2020's severe drop in rig activity was forecasted to start driving production losses. Bakken production reaching Northern Border has remained stubbornly strong however, as previously flared volumes are now reaching the pipe at the expense of AECO molecules.

Production reaching Northern Border reached near all-time highs in the past few weeks. Additionally, the 250 MMcf/d Outrigger processing plant is expected to come online any day now, which could push more gas to Northern Border and keep AECO from delivering 800 MMcf/d to Northern Border this summer.

If AECO can only push 500 MMcf/d to Northern Border this summer, this extra 300 MMcf/d backed up in Alberta would be enough to largely fill storage, and from a Midwest perspective, this loss of 300 MMcf/d in Canadian imports would be a one-for-one offset by more Bakken supply.