Sharp price spikes are likely to continue this winter for natural gas delivered to Washington state’s Sumas hub, reflecting a market plagued by deficient infrastructure struggling to keep up with widespread demand growth in the West, according to traders and analysts.
Located on the Washington State border with British Columbia (BC), Canada, the Sumas hub serves as one of two main entry points for Western Canadian gas to flow into the U.S. Pacific Northwest. Kingsgate, near the Idaho border, is the other.
With little local natural gas production, the Pacific Northwest largely relies on imported supply to serve demand. Rockies natural gas supply is transported into the region during the summer, but come winter, it has to rely on Canadian imports as the Rockies holds onto its supply for local consumption.
“Sumas in winter is always a problem,” said David Dutch, NGI’s vice president of Business Development and Client Support.
Dutch, a former natural gas trader focused primarily on West Coast markets, explained that Sumas receives its gas through Huntington on the Washington/BC border, flowing through Enbridge Inc.’s Westcoast Energy. Built in 1955, however, the 1,800-mile pipeline is one of many examples of the aging infrastructure serving the Pacific Northwest and – more broadly – the western United States.
As such, when maintenance events are planned, or occur unexpectedly, the restriction in gas flows can wreak havoc on the downstream market.
For example, an explosion on Westcoast in October 2018 disrupted Canada gas exports to Sumas and drove spot prices at the hub to a record $161.33/MMBtu that March, when limited supply coincided with unusually high demand stemming from a polar vortex that had moved into the region.
In December 2022, Northwest Sumas spot gas surged to $50.330 amid a jump in demand driven by widespread below-normal temperatures that collided with lower natural gas imports from Canada. There also were pipeline constraints on the El Paso Natural Gas system and low natural gas storage levels in the Pacific region that fueled the rally.
Of course, price spikes aren’t limited to the winter. During the trading week of Aug. 7-11, spot gas at Northwest Sumas hit $4.465 after Gas Transmission Northwest (GTN) declared a force majeure event at the Sandpoint Compressor Station. The force majeure coincided with maintenance on Nova Gas Transmission Ltd.’s NPS 36 Western Alberta Mainline Extension that curtailed upstream gas flows out of the James River area.
For comparison, benchmark Henry Hub prices remained firmly under $3.000 during the same week.
The Supply Vs. Demand Conundrum
“The long and short of the problem at Sumas is an infrastructure that hasn’t kept pace with demand growth out West,” Ken Fuhr, a consultant with Independent Energy Consultants Inc., told NGI.
Fuhr said the Enbridge pipeline is showing its age, and costly repairs would get passed on to capacity holders who don’t want to pay more to reserve space on the pipeline.
However, investment in natural gas infrastructure has been hampered by an environment that has grown increasingly unfriendly to natural gas, even as states including Washington, Oregon and California have passed laws requiring utilities to transition to 100% clean electricity.
Utilities are retiring coal-fired generation to meet net-zero emissions goals by 2040 in Oregon and 2045 in Washington and California. That is increasing utility demand for natural gas to replace the lost coal capacity.
LNG also is boosting natural gas demand. The $3 billion Cedar liquefied natural gas export facility proposed by the Haisla Nation was recently granted an environmental assessment certificate by the provincial government.
With LNG going out from the floating facility in Kitimat, BC, “That is one less source of supply,” Dutch said. LNG Canada is also under construction in BC, and several other export projects that would utilize Western Canadian gas supplies have been proposed for the province.
On the supply side, hydropower plays a vital role in the Pacific Northwest by limiting demand for natural gas in the summer as the snowpack melts, allowing storage inventories to build.
“But by the third quarter, hydro doesn’t matter all that much at Sumas,” according to Dutch.
But natural gas does.
Weekly data from the U.S. Energy Information Administration for the week ending Oct. 13 showed natural gas storage in the Pacific region at 280 Bcf, well above the 186 Bcf in storage during the week ending Dec. 16 – when spot prices at Sumas surged to more than $50 – and 12.4% above the year-ago level.
Storage does help, Fuhr said. But the market remains spooked by last year’s cold weather event and the pipeline constraints that prevent sufficient supply from reaching the critical populated areas of the Pacific Northwest.
As such, the market is on edge regarding Rockies supply. Current sentiment suggests there is less gas output from the region.
Near-Term Outlook
For now, supply is currently outweighing demand.
Wood Mackenzie analyst Quinn Schulz said heating degree day (HDD) demand is forecast to be low over the next couple of days, though a predicted spike in HDDs toward the end of the month may drive additional upward pressure on Pacific Northwest prices.
At the same time, the Pacific Northwest may face tight gas supply stemming mainly from maintenance at the Jackson Prairie storage facility, as well as concurring upstream maintenance on NGTL, according to Schulz.
Without supply-side improvements, traders have factored in the tight balances in Pacific Northwest winter prices.
As of Oct. 23, prices at Northwest Sumas stood at $5.293 for November, $12.529 for December and $12.519 for January, according to NGI’s Forward Look.
Henry Hub, meanwhile, is only expected to reach as high as $3.510 by January.
