Producers blame pipeline work for gas price discount

Alberta fuel trading significantly lower than N. American benchmark

CALGARY • Heavily discounted natural gas prices in Alberta have domestic producers frustrated they could miss out on much of the upside of a global rally as prices skyrocket ahead of the winter.

Natural gas prices are hitting multi-year seasonal highs across North America due to a combination of low storage levels and redhot demand from overseas even before winter heating season begins. The Henry Hub benchmark price in Louisiana traded at US$5.69 per thousand cubic feet on Tuesday, while gas prices at Dawn, Ont. Hub traded at US$5.19 per mcf according to ATB Capital Markets.

By contrast, Alberta’s AECO benchmark price averaged at US$3.12 per mcf on Tuesday — 55 per cent of the Henry Hub benchmark price, or a US$2.57 per mcf discount.

Producers point to maintenance and expansion work on TC Energy Corp.’s Nova Gas Transmission Ltd. (NGTL) pipeline system for the disconnect between Alberta’s market and the rest of North America. NGTL is the largest gas transmission system in Canada and TC Energy also operates the largest network of export pipelines, moving Alberta gas to Ontario and San Francisco.

“The AECO basis, which is really that delta between the two markets AECO and Henry Hub and adjusted for different markets and currencies, is quite large right now,” said Darren Gee, president and CEO of Peyto Exploration and Development Corp., adding that he’s concerned the discount will persist through the winter as TC Energy is expanding its gas transmission system in the province.

“It actually is quite steeply disconnected right now,” he said, referring to the pricing relationship between AECO and U.S. benchmarks Henry Hub and NYMEX.

Gee said that in years past, a $2 per mcf AECO discount was common as there were restrictions on the NGTL system. Now that natural gas prices are higher, AECO continues to trade above the bargain-basement levels of the last several years, but remains heavily discounted to other North American benchmarks during periods of NGTL maintenance.

In an effort to diversify away from the volatility and discounts of the AECO benchmark, producers pay to move their gas on long-haul pipelines to the U.S. West Coast, Chicago and Central Canada, where prices typically trend higher than in Alberta.

“While we do not comment or speculate on the dynamics of the market, we are able to confirm that all outages in question are planned in nature, closely coordinated with our customers and communicated to industry months in advance,” TC Energy said an emailed statement.

Calgary-based TC Energy said the maintenance and expansion work is part of the company’s $8 billion in spending to expand the system and remove bottlenecks over a five-year period. The pipeline giant said flows on the system “have remained robust” at 12.2 billion cubic feet per day.

“While conducting maintenance is an integral part of ensuring the safe and reliable operations of the system, we have and will continue to work with our customers to ensure we can complete this important work while mitigating impacts whenever possible,” the company said.

TC Energy did not say when the scheduled maintenance will wrap up as natural gas producers watch prices jump sharply in other hubs even before the winter heating season begins to draw large quantities of gas out of storage.

“It’s supposed to all be coming on in pieces, mid-october by Nov. 1,” said Raymond James analyst Jeremy Mccrea, adding the scheduled maintenance normally ends before winter heating season begins and prices tick upward seasonally.

“The problem though, and I’m hearing this from a number of producers, given how rampant COVID-19 is here in the province, there is just one delay after another,” Mccrea said, adding outbreaks among field workers is slowing work on many projects.

Asked about delays at its operations, TC Energy said in an emailed response that “flows and utilization levels across our network continue to be in line with historical norms despite the ongoing impacts of COVID-19, extreme weather events and energy market volatility.”