AECO cash prices are trailing the winter strip by a sizable margin over this time last year, incentivizing marketers to inject natural gas into storage, but if Canadian production continues to climb it could lead to stranded volumes during the heating season.
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Given AECO's cash weakness over the past two months, there has been incentive to buy gas now for injection to withdraw later this winter. Over the past month, AECO cash has averaged $3.04/MMBtu, for an average 75 cents discount to the winter strip. This is about 50% wider than last summer's cash-to-winter spread, which was wide enough to drive record injections all summer long.
The issue with injecting now for withdrawal this winter is that the market is pricing in a large discount for AECO. It appears to expect pipeline systems will be constrained, likely due to operators potentially ramping up production, according to S&P Global Platts Analytics.
If producers fill the Upstream James River portion of Nova Gas Transmission Ltd. pipeline system with volumes this winter, any gas that was injected into fields in this part of the system could be stranded. If producers fill USJR to capacity this winter, storage volumes in the East Gate could be stranded also, since NGTL will likely limit access to storage here too if production grows too much.
The East Gate has largely been flowing in excess of its stated capacity since Sept. 3, averaging 4.7 Bcf/d, or a little more than 100 MMcf/d higher than NGTL's capacity from its daily operating plan, according to Platts Analytics data. This would imply the system is constrained. NGTL partially manages constraints by cutting access to storage in the East Gate.
Strong injections around the East Gate could mean strong withdrawals this winter, which could clog up the NGTL system and cause constraint driven weakness at AECO.
Multiple factors are pointing to continued production growth in Western Canada this winter. Alberta's associated gas production and gas demand could see support in the coming months from Enbridge's Line 3 replacement coming online Oct. 3. Concurrent with the Line 3 start-up, the Southern Access pipeline will increase from 996,000 b/d to 1.2 million b/d, providing further throughput in the Enbridge system from Superior, Wisconsin, to Pontiac, Illinois.
The pipeline will keep Canadian crude differentials within solid pipeline economics and is entering service at a good time as crude and condensate supply will reach new highs of 5 million b/d by year-end from 4.6 million b/d in September, with strong oil sands production and a recovery in shale supported by robust rig counts.
With WTI at $75/b recently, this could incentivize further liquids-rich oil drilling this winter as producers look to take advantage of the strong price. This could drive more associated and wet gas supply, some of which would end up on the NGTL system and could be part of the constraint concerns this winter.
One of the largest Canadian operators has indicated plans to accelerate production in the months ahead. On Sept. 22, Tourmaline revised its production guidance for this year and for 2022. In May, the company said it expected 2021 production to average 405,000-420,000 boe/d of and 2022 production to average 440,000 boe/d. Its most recent report, however, lays out 2021 expected production at 440,000-445,000 boe/d, and 2022 production at 500,000-510,000 boe/d.
These substantial increases are in addition to the company moving a sizeable amount of 2022's drilling activity into the last part of 2021. While the company says this is due to drilling efficiency gains and a desire to hang on to its drilling fleet rather than releasing them and then bringing them back in 2022, the urge to complete wells sooner could be strong.
Henry Hub has continued to rally and the winter-strip is trading in excess of $6/MMBtu. Thus, even if constraint-driven pricing does arise for AECO this winter, as the market is calling for, the returns on production this winter could be the highest seen in years.