Western Canada production sets new records as storage deficit, prices drop

Recent record-breaking production in Western Canada has rapidly closed the storage deficit while weakening regional prices.

Production in Western Canada is driving strong injections to close the summer as the region closes in on the five-year average. Western Canada inventories began summer at a 44 Bcf deficit to the five-year average according to S&P Global Platts Analytics' models.

Strong exports to the US Midwest came at the expense of storage injections, and the deficit to the five-year average widened to 56 Bcf by late May. The deficit narrowed in June to about 50 Bcf but widened to 58 Bcf for most of July as production, while still at five-year highs, slowed somewhat.

Since August, however, production has been setting all-time high records, and the deficit sits at 33 Bcf as of Sept. 27. There could be a strong end to summer push on the horizon, as the NGTL pipeline system will allow production to rise about 300 MMcf/d for most of October.

In 2021, production hitting the NGTL system has bucked the trend set in July, August and September, when the system typically sees the lowest production volumes of the year.

Prior to 2021, NGTL's all-time high for production receipts, going back to at least 2005 when Platts Analytics' data begins, was 12.5 Bcf/d set in 2018. This record was set during the month of December, what is typically the peak production month for the region.

The record has been broken many times this summer, including a new all-time high of 12.733 Bcf/d set on Aug. 28. Production typically falls during the summer, bottoming out in August as processing plants undergo turnarounds and the lack of drilling during the spring breakup shows up as declines several months later in August.

The record-setting production may be contributing to the market expecting an oversupply this winter. The AECO winter 2021-22 contract is trading more than $1.00/MMBtu behind the Chicago winter contract, suggesting the market expects AECO to be constrained.

Despite the strong production, Platts Analytics finds the NGTL system should have enough open space to ensure AECO should be unconstrained, and AECO should trade much closer to Chicago than futures suggest.

Some spot prices in Western Canada are moving into negative territory. The dual pressure of strong production and fluctuating outflow capacity drove cash Westcoast Station 2 to flirt with negative pricing Sept. 27. Cash Westcoast Station 2 was trading around 6 cents/MMBtu on NGX in the morning of Sept. 27, with the low for the trading session at negative 5 cents/MMBtu as of 11:30 am ET.

Although Westcoast Station 2 spot gas has seen considerable pricing volatility over the summer and early fall, this will be the location's lowest price since October 2019 if it holds to final settlement.

As part of the Westcoast Energy's fall maintenance schedule, flows at BC Pipeline's 26-inch Alberta West segment were slashed to 0 GJ/d for Sept. 27-29, according to a critical notice posted to pipeline's electronic bulletin board. Flows past the pipeline's 26-inch Alberta West segment averaged around 145 GJ/d over the prior seven days (Sept. 20-26).

Western Canada inventories currently sit just below 445 Bcf and have already eclipsed Platts Analytics' 430 Bcf end-of-summer forecast. This is lessoning the likelihood of inventories ending winter below the five-year range as previously expected. Platts Analytics' assumption that exports to the Midwest fall 200 MMcf/d this winter from last may not happen. This would negate some of the extra gas in storage.