Canadian Natural Gas Companies eager to capitalize on the LNG boom flood the market with excess supply
Analysts said that a huge LNG Canada terminal, led by Shell, could struggle to raise Canadian natural-gas prices dramatically when it begins operating next year, because of a glut of supply waiting to be released. Gas prices at Alberta’s AECO hub
Analysts and executives at the companies estimate that between 800 million to 1 billion cubic feet per day (bcf/d) of gas has been shut down, which is around 5% or more of Canada's total production. Canada is the sixth largest producer in the world. Some producers, like Canadian Natural Resources Ltd, have also delayed the completion of newly drilled wells to wait for prices to rise. On Tuesday, Advantage Energy was the latest producer in announcing temporary curtailments. Calgary-based Advantage Energy began cutting off up to 130 millions cubic feet of dry gas a day last month.
Michael Belenkie, CEO of Advantage, said that he was disappointed by some producers who continued to sell gas below cost instead of cutting production and allowing the prices to recover before LNG Canada began to demand.
Belenkie stated that "producers have basically been ahead-running the growth in demand." In three, six or nine months, we'll see a substantial amount of gas being taken off the system. But people delivered early. The LNG Canada 14 million ton/annum facility is a joint venture of five partners, including Japan's Mitsubishi Corp. and Malaysia's Petronas. It will be Canada's major liquefied gas export terminal, and requires around 2.1 billion cubic feet per day (bcf/d).
AECO's futures market shows that even with this huge demand boost, prices will only reach C$2.46 per gigajoule in September 2025 (C$2.33/mmBtu), around C$1.20/gj lower than what the forward strip suggested a year ago.
Jean-Paul Lachance is CEO of Peyto, Canada's 5th largest gas company. He said that the prices at present do not indicate a windfall for 2025.
He said that there is a growing consensus between producers that LNG Canada will likely not ramp up fully until the second half 2025.
Peyto hedges 70 percent of its production against volatility in the market. Lachance, however, said that he was concerned about companies resuming their reduced volumes too soon once prices improved.
"If everyone brings it back all at once, that will probably strain the market again," said he. He added that many Canadian producers are selling into other North American countries to reduce their exposure of volatile AECO prices. In a September update, LNG Canada reported that the facility was 95% completed and is on track to deliver its first cargoes by mid-2025.
FRONT-RUNNING DESIRE
Jeremy McCrea, an analyst at BMO Capital Markets, believes that LNG Canada will reduce the volatility of the AECO market. This is because limited storage capacity can lead to large price swings.
McCrea stated that it was difficult to imagine gas prices going below C$5. However, the price should remain stable so as to prevent us from dropping to 50 cents.
AECO prices in recent days have risen above C$1.50/gj. This is due to production cuts and an increase in Alberta oil sands' demand.
Martin King, an analyst at RBN Energy, said that a cold winter could also draw gas from storage and boost prices. If prices continue to rise much more this year, RBN Energy analysts say that reduced volumes may return to the market by the end of the year.
King explained that if prices were to rise around C$2.25 on November 20, all the gas that had been temporarily halted would be rushing back onto the market. "Will it end up being a bad thing, and the market short-circuits itself?" (Reporting and editing by Liz Hampton, Matthew Lewis and Nia Williams)
(source: Reuters)
