Analysis: Bakken Shale associated natural gas production rebounds following shut-ins

Denver — Despite a wave of well shut-ins by operators across the Bakken Shale this spring, associated natural gas production looks to rebound sooner than expected, leading to an increase of flows to the US Upper Midwest, likely weighing on competing supply hub prices.

Bakken production is expected to see temporary gains the coming months and rise as high as 1.9 Bcf/d in October, as wells shut during March's oil price crash are brought back online, according to S&P Global Platts Analytics. This will weigh on AECO prices as one of West Canada's main export points faces competition into the Midwest, at least until the winter when Bakken production declines from a lack of new drilling take hold.

Platts Analytics' sample data for Bakken production averaged 2.1 Bcf/d the first three months of the year. After March's collapse in oil prices, it fell to as low as 1.4 Bcf/d in May and has averaged 1.7 Bcf/d since April 1, the start of the summer injection season.

Weaker Bakken production receipts thus lowered deliveries onto Northern Border Pipeline, which delivers Canadian and Bakken volumes to high-demand markets in the Midwest, such as Chicago. Deliveries fell from 1.9 Bcf/d the first three months of the year to 1.3 Bcf/d so far this summer. Until the collapse in oil prices, Bakken deliveries had made steady gains onto Northern Border.

The subsequent loss of Bakken gas subsequently left more space available for West Canada gas into the Midwest. On Northern Border, West Canada supply fell the first three months of 2020 from 27% of the pipe's capacity in January to 22% by March. Over this timeframe, Bakken production was hitting record highs.

However, since the start of the summer injection season in April, Canadian supply has hit as high as 30% of Northern Border's 2.6 Bcf/d capacity, according to Platts Analytics' flow data. On the contrary, Bakken gas had fallen from 71% of the pipeline the first three months of the year to 52% since the start of the summer.

The increased capacity to the Midwest, coupled with West Canada's strong injection demand has helped boost AECO cash basis. AECO cash basis has averaged 22 cents below Henry Hub summer-to-date, $1.01/MMbtu stronger than the five-year summer average.

Bakken production, however, has begun to recover from the temporary shut-ins seen in April/May, weakening AECO in the process. After holding steady in May and June, Platts Analytics' sample production data for the Bakken has risen to 1.7 Bcf/d so far this month, 200 MMcf/d above June. It reached as high as 1.8 Bcf/d, the highest it has registered since late April.

Platts Analytics expects production to rebound to 1.9 Bcf/d by October. However, it will decline thereafter from depressed drilling activity, opening up again an outlet to the US Midwest for Alberta supply. But until then, AECO cash basis should remain weak, as exports to the Midwest compete with Bakken supply for a share of injection demand in the Midwest.