Rising Western Canada imports to US Midwest look to displace Oklahoma gas

Denver — As natural gas imports to the US Upper Midwest from Alberta look to increase throughout the summer, possibly supplanting some supply from Oklahoma, AECO hub prices are at their strongest level in years.

Western Canada has been injecting gas into regional storage fields at record rates this summer. However, S&P Global Platts Analytics models indicate this is not sustainable, likely leading to accelerated exports into the US later this summer. By the time this happens, storage facilities across the US will be approaching maximum working gas capacity. So, if Western Canada needs to push gas into the US, it will need to be displacing gas from other sources in the Midwest.

Western Canada supply utilizes four main pipelines to flow gas into the Midwest, including Alliance, Northern Border, Great Lakes and Viking. Alliance is largely disconnected from the greater Western Canada pipeline network, so gas already injected is unable to readily switch over to Alliance.

Northern Border, which has available space right now, is expected to reach full capacity by August as producers in the Bakken Shale return wells to service that were shut in during the spring's oil price collapse and boost associated gas deliveries to the pipe.

This leaves Great Lakes and Viking as the most likely avenues for Western Canadian gas. With AECO's weakness over the past few years, ANR has sourced nearly 200 MMcf/d of AECO supply from Viking to meet demand on its upper Midwest system. Despite deliveries to gas-fired power plants on ANR's system in Wisconsin currently at multi-year highs, likely due to low prices across the Midwest, ANR is taking less supply from Viking this summer. Instead, it is sourcing more supply from the Chicago area. This gas is likely coming from Oklahoma.

ANR taking less gas from Viking is likely a big reason in exports from Western Canada to Viking dropping from 300 MMcf/d last summer to date to 135 MMcf/d so far this summer, according to Platts Analytics. If AECO needs to push gas out of the region due to full storage, it could likely widen enough to push out some of this supply from the Chicago area in the upper Midwest on ANR.

This would have a strong downward effect on AECO, however, as AECO would have to discount itself in the first place to become more competitive. Also, Chicago area storage is expected to be full by this time. Displacing this gas down toward Chicago would depress Chicago hub prices, which would drag down AECO prices.

However, despite the weakest prices at the benchmark Henry Hub in decades, AECO is boasting strongest summer in years. Henry Hub settled at $1.40/MMBtu to end the month, just 2 cents/MMBtu stronger than the decades-low price set earlier in the month. Strong injection activity has kept AECO basis tight enough that cash prices at the hub have averaged USD$1.44/MMBtu.

This is a vastly better price environment than the summers of 2018 and 2019 when cash averaged 95 cents/MMBtu, and 88 cents/MMBtu, respectively. The futures market expects this to continue, with the balance of summer 2020 futures trading at about $1.40/MMBtu.