For the seven year period from 2008 to 2014 net Canadian exports to the U.S. were declining (i.e., 3.9 BCFD, or 43%). However, in 2015 and 2016 this trend was reversed. This newsletter examines both the underlying drivers behind this reversal in trends and the intermediate-term outlook for Canadian imports.
Regional Assessment: Northeast Declines, While West and Midwest Increases
While increasing Marcellus and Utica production has displaced Canadian exports to the Northeast, this reduction has been more than offset by increases in the West and Midwest. Furthermore, this phenomenon of increasing Canadian exports to the West and Midwest is particularly acute in the summer.
During the summer net Canadian exports in total have increased 1.8 BCFD, with the
nearly 1.9 BCFD of exports to the Midwest and West regions completely offsetting the approximate 0.1 BCFD decline in the Northeast. With respect to the Midwest increased flow on the Alliance, Viking and Northern Border systems helped Canadian exports penetrate in particular the Midwest power market. In the West increased flows on the GTN and Northwest system resulted in displacing Rockies production, particularly at Stanfield.
This gain in summer net Canadian exports was partially offset by an overall 0.3 BCFD decline during the winter, with the majority of this decline occurring in the Northeast region.
Drilling Activity and Production: Both Increasing
Drilling activity in Canada is very seasonal because of the inherent problems with muskeg, which appears in the spring and summer seasons. With respect to winter gas-directed drilling activity the 1Q2017 average rig count of 134 is 47 rigs, or 54%, above 1Q2016 results. This increased drilling activity has resulted in a reversal of the trend for flat to declining Canadian production.
At the core of this increasing drilling activity is the superior well economics for Canada’s prolific and expansive Montney and Duvernay shale plays. Within the Montney sweet spots (e.g., the Tower Lake, Dawson South and Pipestone regions) well economics can be at, or below, $1.00/MCF for the Henry Hub, particularly as the gas/oil ratio has been improving from about 90%/10% to about 65%/35%. As a point of perspective, production per well for industry leaders is about twice that for a superior Permian well. This results in RORs of over 100% at approximately current prices.
For the Duvernay, which has higher gas/ oil ratios (i.e., 45%/55%), individual well production is on a par with Eagle Ford results and about 25% greater than that for the Permian Basin. This results in RORs of about 50% at current prices.
Gas Prices: AECO Prices Increase
Gas prices at the AECO hub (i.e., the primary pricing point for western Canadian supplies) have recovered significantly from their 2016 low of about $1.55/ MMBTU and have averaged about $2.08/MMBTU over the last four months. Most of this increase is the net result of the steady increase in the Henry Hub gas price since mid-2016, as the AECO basis is still about a $0.90/MMBTU discount to the Henry Hub. This 34% increase in AECO gas prices has been a factor driving the increased drilling levels in Canada.
Infrastructure: Expanding
One limiting factor for the expansion of the Montney and Duvernay shales has been the lack of takeaway pipeline capacity from those areas. However, this is in the process of changing. Following a relatively small pipeline expansion in 2016, two major pipeline projects will occur in 2017. These include the fully contracted 0.85 BCFD Towerbirch project for the Montney play, which can be expanded over time, and the 2017 expansion of the NOVA system (i.e., 2.7 BCFD). Following two smaller pipeline expansions in 2018 – one of which relieves a bottleneck for exports on GTN to the Stanfield, OR hub – two pipeline expansions are planned for 2019 (i.e., 2.6 BCFD). These two 2019 projects include the North Montney Mainline project, which already has contracts for 1.5 BCFD with 11 shippers, and NOVA’s Saddle West expansion, which will provide takeaway capacity for both new Duvernay and Montney supplies.
Outlook
The combination of superior well economics, increased drilling activity and new infrastructure likely will result in increasing Canadian exports to the U.S. over at least the next three years, with the focus being on increasing market share in the West and Midwest markets.