The booth of the Kitimat-based LNG Canada energy project during the LNG 2023 energy trade show, in Vancouver, on July 12, 2023.Chris Helgren/Reuters
A huge liquefied natural gas export terminal led by Shell, called LNG Canada, may struggle to dramatically raise Canadian natural gas prices when it starts operating next year because a flood of pent-up supply is waiting to hit the market, analysts said.
Gas prices at Alberta’s AECO hub hit a two-year low of 5 cents per million British thermal units (mmBtu) in late September as storage filled up. The slump has hurt producers who boosted drilling activity this year in anticipation of new demand from LNG Canada and prompted some firms to curtail production.
Company executives and analysts estimate firms have shut in between 800 million and 1 billion cubic feet a day (bcf/d), around 5 per cent of total gas production from Canada, the world’s sixth-largest producer. In addition to curtailments, some producers like Canadian Natural Resources Ltd have delayed completing newly drilled wells until prices pick up.
Advantage Energy became the latest producer to announce temporary curtailments on Tuesday. The Calgary-based company began shutting in up to 130 million cubic feet a day of dry gas last month.
Advantage CEO Michael Belenkie said he was disappointed some producers were continuing to sell gas at a loss, instead of curtailing production and allowing prices to recover until demand from LNG Canada kicked in.
“Producers basically started to front-run the growth in demand,” Belenkie said. “In three, six, nine months we will see substantial off-take from the system, but people have delivered early.”
The 14 million ton per annum (mtpa) LNG Canada facility, a joint venture between five partners including Japan’s Mitsubishi Corp and Malaysia’s state energy firm Petronas, will be Canada’s first major liquefied natural gas export terminal and require around 2.1 billion cubic feet a day (bcf/d) of gas.
Even with that huge demand boost the AECO futures market indicates prices will reach only $2.46 a gigajoule ($2.33/mmBtu) in September 2025, around $1.20/gj less than the forward strip was suggesting a year earlier.
“Right now prices are not signalling there’s going to be a big windfall in 2025, the forward strip has come down significantly,” said Jean-Paul Lachance, CEO of Peyto Exploration, Canada’s fifth-largest gas company.
He said there was a growing consensus among producers that LNG Canada likely will not fully ramp up until the second half of 2025.
Peyto hedges 70 per cent of its production to protect against market volatility, and Lachance said he saw a risk companies could restart curtailed volumes too quickly once prices improve.
“If everybody brings it all back on at once that will probably stress the market again,” he said, adding that many Canadian producers sell into other North American markets to reduce their exposure to volatile AECO prices. LNG Canada said in a September update the facility is 95 per cent complete and remains on track to deliver first cargos by mid-2025.
LNG Canada should reduce volatility in the AECO market, which is prone to big price swings because of limited storage capacity, said BMO Capital Markets analyst Jeremy McCrea.
“It’s hard to see gas going to $5 but it should provide stability so we don’t get down to the 50 cents level,” McCrea said.
In recent days AECO prices have rallied back above $1.50/gj, helped by production curtailments and a pickup in Alberta oil sands demand.
A cold winter would also help draw gas out of storage and lift prices, and RBN Energy analyst Martin King said curtailed volumes could return to the market before the end of this year if prices strengthen much further.
“If it’s November 20 and prices are back up around $2.25 all that gas that been temporarily shut in comes roaring back to the market,” King said. “Is it going to end up being too much of a good thing and the market ends up short-circuiting itself?”