The outlook for gas markets in Canada in 2021 appears mostly positive as exports to the US increase and forecasts for a frigid winter look to draw down the nation's storage surplus while production is set to grow for the first time in three years. Strong injections all summer left Canada with a record amount of gas in storage to start winter, and mild weather both locally and in downstream markets has kept storage trending at five-year highs, according to S&P Global Platts Analytics. Despite current high inventories, unexpectedly strong exports into the US Midwest are on pace to drive Western Canada to end this winter below the five-year average, even under a normal weather scenario. If cold weather arrives as is forecast, this could cause the AECO – Chicago balance of winter 2020-2021 spread to tighten beyond where it currently sits. Great Lakes Gas Transmission has been the biggest driver of stronger Midwest exports, with its 1.4 Bcf/d month-to-date average 250 MMcf/d higher than the five-year high for this time. The pipe is delivering more AECO gas to Northern Natural Gas Pipeline in the upper Midwest, possibly due to declining production in Oklahoma, where NNG gets most of its supply, according to Platts Analytics.
Exports on Alliance Pipeline have also been stronger than expected this winter on strong receipts in Alberta, and appear to be, at least for now, reversing a long-running trend of declining exports on the pipe. Finally, exports even on the much smaller Viking Pipeline are higher than anticipated, with the pipe delivering more to ANR in the upper Midwest as the system sources more gas from Western Canada than Chicago. What's more, expectation are that Bakken Shale production will soon begin declining and open up room for AECO on Northern Border Pipeline. Platts Analytics expects Canadian exports to the US Midwest are likely to average around 3.5 Bcf/d the rest of winter, compared to 3.1 Bcf/d in its current forecast. When this is combined with stronger exports into the US Pacific Northwest, it will make ending the withdrawal season below the five-year average likely. Canadian exports to the Pacific Northwest are forecast to average 3.7 Bcf/d through the rest of winter, which is about 400 MMcf/d stronger than the past three winters. If temperatures finish winter in line with historical norms and exports remain elevated as Platts Analytics expects, then AECO's current US 40 to 50 cent/MMBtu discount to Chicago for the balance-of-winter 2020-2021 should remain. This would allow for mostly full exports on Northern Border while keeping inventories still well above historical lows. However, if cold weather materializes as the Canadian government's weather agency has forecast, then inventories could start to trend toward the five-year low and AECO could tighten as it prices up to keep gas from Chicago on Northern Border. Considering there is cold weather expected the rest of winter, most of the risk to the AECO-Chicago spread likely lies with it tightening on a strengthening AECO.
Production outlook
After two consecutive years of supply loss for Canada, totaling over 700 MMcf/d relative to 2018 levels, Canada is once again set to grow. Platts Analytics is currently forecasting annual growth of 500 MMcf/d in 2021, supported primarily by gains in the Montney in British Columbia. Recently, producers are echoing this sentiment, and possibly raising the stakes even further. Fourteen producers who account for roughly 50% of production have signaled big capital expenditure and production increases in 2021. These producers, which include the two largest in Tourmaline and CNRL, are calling for a CAPEX increase over C$800 million, or 21% higher year on year. Accompanying this big increase in expenditure is an expectation of growth, with these same producers guiding over 580 MMcf/d of annual supply additions. A recent run-up in the gas rig counts well above 2019 levels supports the assertion gas producers are looking to take advantage of a strong AECO strip despite recent Henry Hub losses, especially as many locked in strong hedges in recent months. With ConocoPhillips' recent acquisition of Montney acreage, coupled with their commitments on North Montney Mainline, it may be reasonable to expect they will grow production in 2021. Also, with Petronas and Shell remaining focused on developing their assets for LNG Canada by 2024-2025, there is reason to believe they will continue to keep supplies flat or growing as well. With so much supply growth, exports and demand will need to grow to absorb these volumes next year, particularly when considering storage levels remain at all-time highs and could easily exit winter at or above the five-year average. Demand will be supported by significant growth within the oil sands, which is expected to grow 280,000 b/d year on year. Growth is supported by recent expansions, and pent-up supply from the Alberta government curtailments which expired at the beginning of this month. Supply growth in the oil sands should add somewhere between 150-200 MMcf/d of gas demand growth alone. Additionally, Platts Analytics expects an incremental 300 MMcf/d of demand this summer over last as Alberta's coal fleet continues its conversion to gas fired generation. Exports into the Pacific Northwest are also forecast to increase considerably on the summer, as an expansion that entered service in June and then was hampered for much of summer by maintenance will be online all summer and is expected to see a more normal, less restrictive maintenance schedule. Even with all these additional outlets for AECO gas, whether or not NGTL agrees to terms to allow for more injections this summer as it did last, will likely be the single biggest factor for AECO this summer. If an agreement to boost injections is not reached, then AECO is likely to return to the extreme weakness and volatility of the summers of 2017-2019, even with all the extra demand, according to Platts Analytics.