West Canada spot gas prices plummet as production soars to 16-year highs

West Canada spot natural gas prices plunged in July 11 trading for next-day flows, as Canadian gas production reaches its highest levels since 2006 amid pipeline constraints that limit exports to the US West.

By mid-session on July 11, AECO spot gas had slid more than 50 Canadian cents to trade at C$3.94/GJ, data from the Intercontinental Exchange shows. AECO last settled below C$4.00/GJ in February. Westcoast Station 2 saw an even deeper plunge in July 11 trading than AECO did, dropping C $1.13 to trade around C $3.36/GJ.

Skyrocketing Canadian gas production is driving the spot price collapse. Data from S&P Global Commodity Insights shows that Canadian gas production reached 17.7 Bcf on July 11, up more than 500 MMcf/d since the start of the month. The July 11 level is just a hair below the all-time record high for Canadian production of 17.73 Bcf on April 14, 2006, according to a dataset that stretches back to January 1, 2006.

Richard Frey, an energy analyst with S&P Global Commodity Insights, attributed the higher production to buoyant gas prices across North America that have tempted Canadian producers to open the taps.

"Canadian producers were in better shape, debt-wise, than their US counterparts when prices began to rise, and they likely had a longer leash to boost production and take advantage of the price environment," Frey said in an email.

"While perhaps a smaller factor, expansions on Western Canada's primary gathering system, NGTL, also have enabled higher production level."

The combination of those two factors – high prices and expanded gathering capacity – has led S&P Global Commodity Insights to expect another year of soaring Canadian gas production in 2023, Frey said.

Pipeline constraints

Even as Canadian gas production ramps up, planned maintenance work on export pipelines have limited outflows into Canada's main export market, the US. This has particularly been the case for West Canada flows into the Pacific Northwest.

The two main border crossings for Canadian gas to flow into the US West, Sumas in Washington State and Kingsgate in Idaho, have been impacted by maintenance-related capacity restrictions this summer.

Gas Transmission Northwest's Kingsgate, which has a full operational capacity of around 2.74 Bcf/d, has had its flow capacity limited to 2.29 Bcf/d for July 7-13 while the pipeline works on Station 7 Unit C, according to a July 8 critical notice. The flow restrictions for Kingsgate are set to loosen slightly to 2.36 Bcf/d for July 14-16, before tightening to 2.00 Bcf/d July 17-23 while the pipeline modifies Eastport Station 3 and conducts hydrotests.

Flows past Sumas on to Northwest Pipeline have also been affected by scheduled pipeline maintenance, but upstream in Canada on Westcoast Energy's pipeline system.

Operational capacity at Westcoast Energy's Station 4B South will remain below its full design for the entirety of July, fluctuating between 1.3-1.5 Bcf/d through July 31, according to a month-ahead capacity post published June 23.