CIBC Notes WCSB Natural Gas Pricing Implications Under Growing LNG
Exports
WCSB natural gas price differentials should tighten versus U.S. benchmarks as the
LNG Canada project comes online: Fixed tolls can range from ~$1.00/Mcf to ~$1.80/Mcf to
access certain pricing markets outside of Western Canada. Given fixed tolls are a sunk cost,
we believe AECO basis could conceivably move towards variable cost tolls in order to
incentivize natural gas to stay in Western Canada during periods of high demand. Variable
costs are typically a function of fuel charges on the system (typically <$0.50/Mcf to distant
markets), and fuel costs will fluctuate with gas pricing. Given the volume of exports in
Western Canada are greater than 50% of what is produced, it is difficult for us to see a
scenario where AECO trades at a premium to NYMEX, at least for any meaningful duration,
as shippers will simply otherwise sell at AECO.
Pricing benefit is likely favorable for Canadian producers, but timing is everything:
Although 2023 volumes are likely to underperform our original forecasts, we expect natural
gas volumes to grow by 0.5 Bcf/d to 0.8 Bcf/d annually out to 2026E. We explore potential
scenarios if this does not occur in conjunction with the timing of LNG export commissioning:
1. High price case (AECO differential: <US$0.50/Mcf): If LNG Canada ramps up exports
earlier than expected (i.e., mid-2024) or production growth underperforms our
expectations, local prices will have to compete with export markets in order to retain
natural gas for domestic consumption. It would be possible to see AECO briefly trade at a
premium to NYMEX in order to incentivize gas to stay in Western Canada in this case
and we see it as possible that AECO could temporarily trade at a less than US$0.50/Mcf
differential to NYMEX, closer to variable tolls of $0.15/Mcf to $0.25/Mcf.
2. Base price case (AECO differential: ~US$0.50/Mcf): If LNG Canada ramps up exports
beginning in early 2025, and modest production growth ensues, we expect that the
increased demand will outpace production growth and have a favorable impact on
pricing. Our assumption is AECO differentials strengthen in the beginning of 2025 and
are sustainably stronger throughout the year (US$0.60/Mcf).
3. Low price case (AECO differential: >US$1.50/Mcf): If LNG Canada is delayed in
exporting to a period later than 2025, or production growth outperforms our expectations,
we believe the AECO pricing impact could be negative to our estimates given the
increase in supply will offset the increase in demand. We see BC producers as being the most likely to benefit given proximity to Coastal
GasLink: We expect that BC operators (ARX, KEL, OVV, TOU) could benefit from potential
pricing strength at Station 2, although expect that AECO pricing will also benefit producers.
Exhibit 6 includes a bar chart of the physical hub exposure, demonstrating where each
company is expected to market its gas volumes in 2024. We would not be surprised if
producers sought to increase hub exposure to WCSB benchmarks in 2025.