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Research & Insights
30 Dec 2021 | 18:06 UTC
By Brandon Evans and Richard Frey
Highlights
Canadian producers take advantage of high prices
Less fettered by debt than US counterparts
Unburdened by the debt plaguing their US counterparts, Canadian producers are striking now, accelerating drilling and completion activity while prices sustain decade-long highs, but a possible overload to takeaway capacity could lead to constraints and provide downward pressure to local pricing hubs.
Summer 2022 AECO futures are still indicating the market has considerable concerns about constraints on the NGTL Pipeline system. Flows through NGTL's Upstream James River production zone have been averaging 11.4 Bcf/d or 460 MMcf/d below capacity since Dec. 8 when maintenances concluded and the system was opened to its full capacity, according to S&P Global Platts Analytics.
That production has come in lower than capacity has largely reduced fears of constraint-driven weakness at AECO for the rest of this winter. However, concerns about this upcoming summer are still very present, as indicated by futures pricing.
Summer 2022 AECO futures were trading about US$1.00/MMBtu below Chicago at the end of 2021. While this is about 20 cents stronger than the beginning of December, when fears of production overwhelming NGTL were still very present, Platts Analytics views anything wider than a 70-cent summer spread between the hubs as evidence of constraint fears, especially with inventories trending well below historical norms.
Fears about Upstream James River capacity this coming summer could be one reason for the summer futures weakness. Upstream James River is currently forecast to average 12.26 Bcf/d, which would be a massive 1.2 Bcf/d increase over last summer.
The hefty increase in USJR capacity does not appear to be easing market concerns about a constrained AECO in summer 2022. One reason is that this full capacity increase may not materialize as projected.
In mid-April, when Platts Analytics began scraping NGTL Daily Operating Plan Data, USJR capacity for the remained of summer was projected to be 11.143 Bcf/d, yet it only averaged 10.943 Bcf/d. The capacity ended up being 200 MMcf/d lower than projected in mid-May.
This means additional maintenance for USJR is likely to appear on the calendar, and Platts Analytics expects USJR capacity will likely be well below 12.3 Bcf/d next summer.
The East Gate presents a similar issue in that while next summer's projected 5.3 Bcf/d capacity would be a big increase over summer 2021's 4.7 Bcf/d capacity, in mid-April East Gate capacity was scheduled to be more than 100 MMcf/d higher at 4.7 Bcf/d. Fears that USJR and East Gate capacity will be lower than currently scheduled is likely a reason for AECO's weakness in summer 2022.
Production in Western Canada increased significantly during 2021, breaking previous records, with volumes slated to grow in 2022, according to Platts Analytics. Production in the region averaged 15.92 Bcf/d in 2021, or 600 MMcf/d higher year over year. It's expected to average 16.5 Bcf/d in 2022, with new production records likely to be set on a near-monthly basis.
As most major US oil and gas operators continue to practice capital discipline, producers in Western Canada are taking advantage of decade-high prices and ample takeaway, pulling record-high volumes from the ground in the process. With production on Western Canada's primary natural gas network, NGTL, repeatedly setting all-time highs over the past several months and rigs at multi-year highs, output is potentially gearing up for an exceptionally strong winter, according to Platts Analytics.
Thus, producers could look to be making the most every molecule they can this winter to take advantage of potentially once-in-a-decade pricing. If producers manage to do this and still stay under NGTL's capacity limits, it could be a banner year for them.