Supply, storage issues help Westcoast Station 2 gain on AECO-NIT prices

Friday, July 20, 2012

Production cuts in British Columbia this year and brimming Alberta storage fields have led spot natural gas prices at Western Canadian hub Westcoast Energy, Station 2, to narrow significantly their historical discount to AECO-NIT prices.

Production in British Columbia averaged more than 1.66 Bcf/d year-to-date through Tuesday, according to modeled data from Platts unit Bentek Energy. That was a 7% drop from the province's more than 1.78 Bcf/d through the same period in 2011, the data shows. In Alberta, production has fallen off to a lesser degree, by almost 4.5%.

Bentek's model shows year-to-date Alberta production is averaging 11.28 Bcf/d. While that appears higher than 2011 year-to-date levels of 10.74 Bcf/d, the 2011 levels do not capture pipeline flows from ATCO, a major Alberta regulated utility. When adjusting for ATCO data, which was included in Bentek's Alberta sample starting October 1, Alberta production actually shows a 500,000 Mcf/d year-over-year decline.

British Columbia's Horn River Shale is a pretty expensive play to drill, said Bentek analyst Rick Margolin. That has led producers to pull back until gas prices kick back up to a level that makes that drilling more profitable.

On Wednesday, Bentek showed Alberta's storage inventory at 393.25 Bcf, up 50% from the same time last year. For British Columbia, storage was at almost 41.44 Bcf, down 26% from last year.

The same captive markets that Margolin cited, though, will make it hard for Station 2 to stick with AECO if demand fails to substantially materialize in Station 2's markets. That would cause it to revert to its customary discount to AECO, Margolin said, adding that Bentek has seen signs of that reversion in the past 30 days as Pacific Northwest power demand has fallen off.

For more information please visit Platts Website.