ANALYSIS: TETCO outage diverts natural gas flows to Midwest, cutting into AECO prices

Elevated Canadian production and exports are facing unexpected headwind as the ongoing outage on Texas Eastern Pipeline has diverted Appalachian volumes to the US Midwest, dragging down AECO prices.

Texas Eastern's outage, which is restricting flows between the US Northeast and Southeast, is resulting in more gas getting pushed from the Marcellus into a key outlet for AECO, the US Midwest, and is weighing on prices, according to S&P Global Platts Analytics.

AECO's cash basis has declined considerably over the past month, sliding from a 27 cents/MMBtu deficit to Henry Hub in late May to 55 cents/MMBtu behind the benchmark as of June 30.

Northeast supply to the Midwest is on pace for its second strongest month ever at 7.4 Bcf/d, up from 1.15 Bcf/d in April. Nexus Pipeline is driving about half of this increase and is flowing about 1.4 Bcf/d into the Midwest currently, up about 200 MMcf/d from prior to the outage.

As this is occurring, the recent production surge in Western Canada is weakening AECO to push the extra gas out to the Midwest up to average 3.7 Bcf/d in June from 3.4 Bcf/d in April and May, adding to the region's influx of supply.

Texas Eastern's most recent update indicates its outage will continue late into 3Q 2021, meaning Chicago will be dealing with excess Northeast supply for the bulk of this summer. This will undercut AECO outright prices as it sends marginal molecule into the Chicago market

However, with the Henry Hub rally, prices still look supportive for producers.

Canada is currently poised for strong production during the second half of 2021 for oil and gas after seasonal declines as operators struck an aggressive tone in the most recent quarterly earnings. More than a half dozen increased capital guidance, while nearly a dozen operators increased their production guidance due to the strong commodity prices.

Despite some increases in capital expenditures, nearly all operators reported reducing net debt levels in the first quarter. Based on strip prices and Platts Analytics forecast prices, which see Brent top $70/b this summer and Henry Hub nearly $3/MMBtu for the balance of 2021, operators should continue to realize strong free cash flow. This will allow debt levels to decline while also increasing more capital to the drill bit and/or shareholders. Canadian operators are on average increasing capital expenditures (+13%) at a stronger rate than US operators (+1%) and international (+8%).

Declining Oklahoma production has also made room for West Canada to send more gas to the US Upper Midwest. The US Midwest shows a shift in supply this summer over last that has helped West Canada send more supply to the region.

The biggest change summer over summer has been from Oklahoma, where inflows to the Chicago market are down 750 MMcf/d, according to Platts Analytics. This summer's lower Oklahoma-to-Chicago flows of 2.1 Bcf/d are a continuation of a long trend. The summer of 2020 saw them average 2.9 Bcf/d summer to date, down from 3.8 Bcf/d in the summer of 2019 through this point. This has been due to declining production in Oklahoma, which averaged 7.8 Bcf/d summer to date in 2019, 6.5 Bcf/d in 2020, and 6.1 Bcf/d through this point this summer.

Platts Analytics does expect these losses to begin leveling out, as inflows from Oklahoma are forecast to average about 1.8 Bcf/d in 2022 and 2023, as production losses become less sharp around 5.6 Bcf/d in 2023. This means the dynamic that is helping to increase AECO's market share around Chicago will be there for the foreseeable future once the extra inflow from the Northeast subsides.