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British Columbia pipeline shuttered after flooding bringing stronger Sumas prices

Highlights

Sumas futures leap following outage

Cold weather could push prices higher

The shutdown of one of two natural gas lines on Westcoast Energy's BC Pipeline system, following severe flooding in the Vancouver, British Columbia, area, has spiked prices at some regional price hubs, and higher demand could lead to price blowouts.

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The flooding Nov. 15-16 resulted in Westcoast taking the smaller of the two mainlines, a 30-inch pipe that supplies the Sumas export hub at the British Columbia-Washington border with gas from Westcoast Station 2, offline.

Westcoast parent Enbridge Nov. 16 announced capacity into Huntingdon, just north of Vancouver, would be cut to about 1.5 Bcf/d from 2 Bcf/d. This effectively cuts supply to Vancouver and the Sumas hub. No timeline has been provide on when the line will return to full service.

This loss of supply to Sumas sent prices at the hub to about USD$6.00/MMBtu from $4.70/MMBtu the two weeks prior. Vancouver takes what it needs off the pipe and what remains is available for Sumas. If cold weather moves into Vancouver and boosts demand, Sumas could be extra vulnerable to price blowouts during this outage, according to S&P Global Platts Analytics.

This is the same pipeline that experienced an explosion on Oct. 9, 2018. At that time, prices at Sumas spiked on the loss of supply, while prices upstream at WCST2 weakened. Depending on the duration of the outage, this has the potential to weigh on AECO as well this winter. The loss of WCST2's outlet to the south could push more supply to the NGTL system where production is already threatening to overload NGTL and AECO this winter. South of the border, however, the Western Canada supply loss is boosting cash prices, but the futures market is not fully capturing the upside to the coming months.

Sumas futures spiked as soon as the outage was announced. The December contract saw the biggest increase, with each subsequent month's contract increasing less than the month prior. This would indicate the market expects the risk of the pipe remaining offline decline as winter goes on, and that the biggest risk to prices is in December, according to Platts Analytics. The April and May contracts for Sumas have remained unchanged on the news of the shutdown, suggesting the market expects the pipe to be back online by summer.

WCST2 sits on the other side of the constraint, and this drop in takeaway capacity drove cash prices lower to an 88-cent discount to AECO for Nov. 17's gas day. WCST2's December contract also fell dramatically relative to AECO, although the rest of the winter month contracts saw a much smaller decline.

Enbridge's reduction at Huntingdon reduced flows by roughly 300 MMcf/d. This reduction has trickled down into the Pacific Northwest. Northwest Pipeline connects with Canada at Sumas, not far south from Vancouver. It then flows south towards the Seattle and Portland demand hubs. Flows the seven days prior to Nov. 16, when Enbridge made its announcement, averaged 1.2 Bcf/d at Sumas, according to Platts Analytics.

The days since have averaged just under 900 MMcf/d, nearly an equal reduction as Enbridge's reduction at Huntingdon. Gas Transmission Northwest is still under capacity restrictions, limiting total flows from Western Canada into the Pacific Northwest to 3.3 Bcf/d. Should the restrictions at Huntingdon continue, it will likely ensure Western Canada flows to the Pacific Northwest underperform expectations at a time with Pacific Northwest and PG&E demand ramps up.

The Pacific Northwest will need to draw from additional Rockies supply just as it did in October 2018. In the days following the explosion, supply from Western Canada to the Pacific Northwest fell, forcing the region to draw on additional Rockies supply. As demand in the Pacific Northwest and PG&E rise the coming days and weeks, the draw on Rockies gas is likely to grow.

While Stanfield and PG&E Malin cash prices have risen in recent days, the December contract remains largely unchanged. Malin December futures have averaged $5.82/MMBtu the past three days, barely changed from the $5.72/MMBtu and a far cry from the $1/MMBtu or so swing in Sumas contracts. Malin, and Stanfield, also does not have the month over month weakening of the upward swing Sumas had, suggesting the market is not appreciating the recent rise in risk to December prices compared with the following months.