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A slow-burning crisis for Western Canadian natural gas is starting to boil over, with depressed prices and inadequate pipeline access forcing producers to brace for the worst.

The price of Alberta natural gas, known as AECO, is trading at a deep discount to rival North American gas prices, including that of DAWN gas in Ontario, as well as Henry Hub gas in the United States. As of Tuesday, AECO traded at less than half of the price of Ontario gas.

Headlines about heavy oil’s woes have overshadowed the plight of gas producers. The price of oil sands crude, known as Western Canadian Select, was US$50 per barrel below its global benchmark last October, although the gap has narrowed recently to less than US$10.

Yet natural gas producers can no longer hold the line. Last week, Peyto Exploration and Development Corp. unveiled a new three-year vision that included slashing its dividend by two-thirds and curtailing production to buckle down for a prolonged era of depressed prices. Peyto also plans to build its own storage facility, so that it can store gas produced in warmer months when consumer demand isn’t nearly as high.

Peyto’s share price has dropped 15 per cent since the announcement, and it’s now down 84 per cent from the 2014 peak.

Chief executive officer Darren Gee cautioned that his company does not operate in a vacuum. “This is not a Peyto issue," he said in an interview. “This is a Western Canadian natural gas issue.”

“We’re not getting a fair and reasonable price for our gas in the first place, and the volatility is scaring away investment dollars," Mr. Gee said. "Nobody likes to talk about it because of the fear it creates in capital markets for investments.”

The pain is particularly severe for those gas producers who are not exposed to the liquids-rich Montney formation, which spreads 700 kilometres from north to south across the British Columbia and Alberta boundary. The Alberta government appointed a panel of industry veterans to develop a road map to recovery for the industry last year, and in their final report they concluded that “legacy gas producers (pre-2008) account for roughly one-third of current provincial production and are at existential risk in these market conditions."

But in the current environment, even former industry darlings such as Seven Generations Energy Ltd. are forced to develop new strategies. Like Peyto, the company has slashed capital spending – and lately it has talked up the natural gas liquids it produces. Condensate, which is a byproduct of natural gas production used to make automobile gas and jet fuel, now accounts for 70 per cent of its revenue. And not only is there ample demand, but there is a sure way to get it to buyers “We can truck liquids," Seven Generations CEO Marty Proctor said at an investor day in early January. “We can’t truck gas. It must be pipelined."

Much like heavy oil, pipeline access has become a major problem for natural gas producers. TransCanada Corp. runs the dominant Nova network that moves gas from the fields to export pipelines, and much of the system was built in the mature southeast Alberta market – not the popular, low-cost Montney and Deep Basin plays in northwest Alberta and northeast British Columbia.

Unpredictable maintenance schedules for pipelines have also made AECO gas prices rather volatile. Last summer, TransCanada announced some unplanned maintenance on its Pipestone compressor station for almost all of July, and the price of AECO plummeted. At times, the price has even turned negative because there was so much oversupply.

In an e-mail, TransCanada said it is in the process of updating its Nova pipeline system with a $9.1-billion expansion plan that will connect 25 per cent more gas to new markets by the end of 2022. “An expansion of this size can take three or more years to install as we move through an increasingly challenging regulatory regime,” the company said.

TransCanada also noted that it tries its best to optimize pipeline. “Maintenance is scheduled as far in advance as possible, in some cases as far as a year in advance,” a spokesperson wrote.

However, even if the pipeline issues could be resolved, the United States is experiencing a shale gas revolution, which means the supply of gas in North America is growing exponentially.

“Our dominant export market is now our primary competitor, and western Canadian gas will struggle to retain, let alone grow, its market share within North America," the Alberta expert panel warned.

While a $40-billion plan to build a liquefied natural gas project on the coast of British Columbia was approved late last year, offering some hope that Alberta gas will one day be exported to Asia, the idea has already proven controversial. This month, protesters blocked access to a pipeline that is being built to carry natural gas from northeast B.C. to the West Coast.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/05/24 4:00pm EDT.

SymbolName% changeLast
TRP-T
TC Energy Corp
-0.55%52.27
PEY-T
Peyto Exploration and Dvlpmnt Corp
+1.09%15.73

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