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Weather, US competition combine to pressure Canada's natural gas producers

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Weather, US competition combine to pressure Canada's natural gas producers

Despite the best efforts of governments and pipeline companies to revive it, Canada's natural gas industry faces another year in critical condition as production continues apace while competition intensifies from other regions of North America.

Gas prices have remained stubbornly low in Canada's most productive region as producers have developed the prolific Montney and Duvernay shales that straddle the Alberta-British Columbia border. Canada's National Energy Board estimated that production of marketable gas will total 16.1 Bcf/d in 2018, compared with about 15.5 Bcf/d in 2017.

The shales are rich in natural gas liquids, particularly condensate, which is used as a thinning agent to allow tar-like bitumen from Alberta's oil sands to flow through pipelines. The increase in condensate production creates more dry gas to be marketed at the AECO hub, along with propane and other NGLs. TransCanada Corp. offered deeply discounted tolls to move gas along its underused mainline system to central Canada, the biggest domestic gas market, and although producers snapped up all the discount space, competition from U.S. shales has continued to keep a lid on prices.

Spot gas prices at the benchmark AECO C hub averaged C$1.53/Mcf for the year as of Dec. 20, or about US$1.18/MMBtu, according to data compiled by the Petroleum Services Association of Canada. By comparison, gas at the U.S. benchmark Henry Hub averaged US$3.14/MMBtu in the same period. Forward prices for 2019 stood at C$1.39/Mcf, indicating little optimism for a price increase soon.

Weather has also created a challenge for Canadian gas marketers as above-normal temperatures have dampened local demand in the critical winter season, failing to empty storage needed for new production. "Draws so far this withdrawal period are now 66% below normal, dealing a crushing blow to the AECO market," analysts from Tudor Pickering Holt & Co. said in a Dec. 21 note.

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Alberta's government, which derives revenue from the sale of oil and natural gas through royalties, has attempted to kick-start its petrochemicals industry with a series of incentives aimed at luring new plants to extract chemicals from NGLs. An initial round of C$500 million in royalty incentives in 2016 prompted Inter Pipeline Ltd. to sanction a C$3.5 billion plant just outside Edmonton, Alberta. Pembina Pipeline Corp., which had announced plans to build a propane dehydrogenation and polypropylene plant under the same program, pushed a final decision on that project to 2019, citing a lack of committed buyers for its output.

In addition to announcing a fresh round of incentives for petrochemicals producers in November, the Alberta government in December appointed an LNG investment team to find ways to ensure gas from the province is making its way to planned export facilities. The team will promote Alberta gas and look for ways to help reduce regulatory barriers for proponents of LNG terminals.

Despite the incentives, Alberta still faces stiff competition from U.S. shales for natural gas and NGL sales. The latest competitor is North Dakota, where gas produced as a byproduct of a burgeoning shale oil industry is starting to displace gas from the province in high-demand markets from the U.S. Midwest. And a giant petrochemical complex Royal Dutch Shell PLC is building in Pennsylvania has taken advantage of state and local incentives that dwarf Alberta's subsidies.

But Alberta Premier Rachel Notley said she is determined to battle the competition to keep jobs in her province. "For decades, we've been settling for less while seeing new jobs and investment go south of the border," Notley said in November as she announced the renewed petrochemical incentives. "The time is now to think big, take action and finally upgrade more of our energy at home."