Production soared to record levels in Canada and intersected with a relatively mild winter earlier this year. This left the country with robust supply and weak natural gas prices. It also resulted in elevated levels of exports to the Lower 48, where buyers capitalized on relatively low-cost gas.
However, the pending ramp up of LNG Canada could soon begin soaking up excess natural gas and impact prices on both sides of the border, according to analysts and producers.
The Shell plc-led liquefied natural gas export project in British Columbia has been testing its terminal and is targeting final commissioning this year. Commercial operations are slated to follow in 2025, when LNG Canada could process up to 2 Bcf/d – or more than 10% of Canadian output at its record level. The country recorded all-time high production around 19 Bcf/d in 2023 and again early this year.
What’s more, production slowed some this spring and summer in response to low natural gas prices, falling below 18 Bcf/d, according to government data and RBN Energy LLC estimates. The NOVA/AECO C hub in Western Canada, for example, averaged C65 cents/GJ on Tuesday, according to NGI data. That was about half the level of NGI’s U.S. National Avg. after currency adjustments.
For the week ended Aug. 2, the latest Enverus and Baker Hughes Co. data showed the Western Canadian gas-directed drilling rig count rose week/week by two to 69, though that marked one rig less than a year earlier.
“The gas rig count continues to post minimal increases and remains behind the pace of last year,” RBN analyst Martin King said.
Canadian Natural Resources Ltd., for one, has planned to hold the line on production through this year until prices improve, management said.
With its second quarter earnings announcement, the Calgary-based firm said about 20 of the company’s remaining planned 2024 natural gas wells would be drilled and “curtailed,” meaning they will be completed but not turned to sales until prices rise, according to President Scott Stauth. These wells would make up about half of the gas-directed wells planned for the year, Stauth told analysts during the company’s earnings call.
The thinking boiled down to a near-term pause with an expectation to switch into a higher gear when LNG Canada comes online.
Calgary-based Precision Drilling Corp. said during its earnings call that LNG Canada will lead to an increase in Montney Shale drilling in 2025. Exploration and production (E&P) customers are discussing plans to activate natural gas-directed rigs in the Montney by mid-2025, CEO Kevin Neveu said.
“An awful lot of drilling has gone on over the past three years in the Montney,” Neveu said. “The gas has actually kind of oversupplied the system.”
However, Montney-focused E&Ps “built up an inventory of gas supply now for the opening of LNG Canada,” he said. “No question about that…We’re sensing that once that plant gets running and sustains operations, they’ll need to continue drilling and probably increase drilling.
“That’s why we’re sensing that there’s probably going to be a further step up in rig demand once that plant’s running, which should be about mid next year when it’s at full capacity.”
Strong Imports
Wood Mackenzie estimated Canadian imports into the Lower 48 averaged 6.8 Bcf/d over the seven-day period through Monday of this week. That was up 1 Bcf/d from year-earlier levels. This has helped to keep U.S. supplies at hefty levels, as well. Lower 48 prices also have been low most of 2024, hovering below year-earlier levels.
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U.S. production slowed in response, dropping from record highs around 107 Bcf/d early in 2024 to about 102 Bcf/d in recent weeks following a winter in the Lower 48 that was even milder than that of Canada’s. But American output remained near year-earlier levels and elevated relative to historic norms, according to Wood Mackenzie estimates, because U.S. producers also are awaiting a burst of new LNG demand.
Five LNG projects are in the works along the Gulf Coast to increase U.S. export capacity from 14 Bcf/d to nearly 25 Bcf/d by the end of the decade. That looming demand galvanized producers to ramp up earlier this year and, while they have since eased activity, most are hesitant to pull back too sharply. It takes time to build back up on the production front, and they don’t want to miss out on the LNG boom.
As such, overall supply has remained robust in the Lower 48 and Canada.
As of late July, EBW Analytics Group noted that Canadian natural gas storage levels were 203 Bcf above the five-year average. U.S. inventories exceeded historical norms by 441 Bcf as of July 26, according to the U.S. Energy Information Administration.
EBW’s Eli Rubin, senior analyst, said that until more LNG demand comes online, prices on both sides of the border could struggle for momentum, even with production leveling off. However, when calls for feed gas do mount next year, he said production may need to climb substantially to keep pace with demand – or prices may spike.
