RE:RE:RE:Minority Gov Meanwhile AECO storage is extemely low. Perhaps NG prices will be set to rise in Alberta/BC over the next few years providing positive cash flow & impetus for further NG pipe projects in the WCSB. From the Peyto CEO report... AECO’s Back in The Game, Baby!
After nearly two years of effort, Canadian natural gas producers, along with the Alberta Government, on behalf of AB residents (royalty owners), were successful in helping NGTL achieve a Temporary Service Protocol (TSP) starting on Sept 30, 2019 (actually Oct. 5 after this latest outage). This is big news for AECO gas and will help to fix the disconnected market we’ve experienced for the last two years. Figure 1 Source: EIA, Enerdata As illustrated in Figure 1, WCSB gas producers have been suffering from a 50% discount to the broader market price (NYMEX) since the service protocol was changed in July of 2017. As discussed in past reports, the effect of that change was to prevent access to storage during maintenance periods in the summer, which basically shrunk the available market and cratered prices. This change back was a recommendation (#7) originally made by the Alberta Natural Gas Advisory panel, led by former TCPL CEO Hal Kvisle, which was “to reverse the July 2017 restriction protocol back to restricting firm receipts” which would hopefully “minimize operationally induced AECO-C price volatility.” The panel’s report to the Government of Alberta back in November was filled with many other recommendations for reviving Alberta’s Natural Gas Industry - some 48 of them. Most involved ways to improve market access, both in North America, using additional pipelines, and globally, using LNG exports, but it was this Recommendation #7 that many keyed upon. Now that this new TSP is in place, storage should begin to function properly, and we should see a much less volatile natural gas price, and in turn a more predictable and investable Canadian gas market. The impact to producers, like Peyto, will be mostly on future economics but also any unhedged gas production. For instance, the full-cycle internal rate of return of a typical Peyto Notikewin well at $2/GJ flat gas price versus a $1.50/GJ flat gas price is 40% versus 13%, respectively. We’d see the same kind of improvement for a Wilrich or a Falher well.
Our Cardium wells would also improve but they are less sensitive to just gas price increase since they have higher liquid yields. What this means is we can now justify adding several additional plays to our rig schedule. The increased free cash flow from the unhedged production should also result in additional debt repayment and decreasing debt to cashflow ratios. While this new protocol is only in effect for October 2019 and summer (April-October) 2020, the entire AECO forward curve continues to strengthen as a result. That’s because for this winter, AECO connected storage levels are already dangerously low and will be completely empty when we get around to refilling them next summer. I refer to AECO connected storage rather than Western Canadian storage (like most reports do) because storage pools like Aiken Creek in BC and North Battleford in Sask. don’t really affect the AECO market so they shouldn’t be included. Figure 2
Last spring, AECO storage was effectively “empty” when levels got to 225 BCF. That’s because the USJR storage pools (Figure 3) are no longer effective due to a lack of Interruptible Receipt service (IT-R). Dimsdale (105 BCF), Edson (50 BCF), Carrot Ck (35 BCF), and Brazeau (33 BCF), collectively 223 BCF, are all basically “full” and can’t empty because that portion of the Nova system is over contracted with FT-R and there hasn’t been meaningful IT-R available to storage operators for several years. In fact, on average over the last two winters, IT-R was only available in USJR on 24 days out of the 151 days of winter, and only at an average of 12% on those days. In other words, for only 2.9 days of the winter could USJR storage contribute. Based on our projected refill, we’ll only have approximately 65 BCF of “useable” EGAT storage until we’re back to the empty line. That’s not a lot, considering in the last two winters we needed 162 BCF and 136 BCF, respectively. That’s why the TSP is such a big deal. Empty supplies this winter, followed by stronger demand next summer to refill storage, and then an expanded system in 2021 will ensure AECO will be a fair gas market once again. Which is why Peyto is actively increasing our AECO exposure.
AECO’s Back in The Game, Baby! After nearly two years of effort, Canadian natural gas producers, along with the Alberta Government, on behalf of AB residents (royalty owners), were successful in helping NGTL achieve a Temporary Service Protocol (TSP) starting on Sept 30, 2019 (actually Oct. 5 after this latest outage). This is big news for AECO gas and will help to fix the disconnected market we’ve experienced for the last two years. Figure 1 Source: EIA, Enerdata As illustrated in Figure 1, WCSB gas producers have been suffering from a 50% discount to the broader market price (NYMEX) since the service protocol was changed in July of 2017. As discussed in past reports, the effect of that change was to prevent access to storage during maintenance periods in the summer, which basically shrunk the available market and cratered prices. This change back was a recommendation (#7) originally made by the Alberta Natural Gas Advisory panel, led by former TCPL CEO Hal Kvisle, which was “to reverse the July 2017 restriction protocol back to restricting firm receipts” which would hopefully “minimize operationally induced AECO-C price volatility.” The panel’s report to the Government of Alberta back in November was filled with many other recommendations for reviving Alberta’s Natural Gas Industry - some 48 of them. Most involved ways to improve market access, both in North America, using additional pipelines, and globally, using LNG exports, but it was this Recommendation #7 that many keyed upon. Now that this new TSP is in place, storage should begin to function properly, and we should see a much less volatile natural gas price, and in turn a more predictable and investable Canadian gas market. The impact to producers, like Peyto, will be mostly on future economics but also any unhedged gas production. For instance, the full-cycle internal rate of return of a typical Peyto Notikewin well at $2/GJ flat gas price versus a $1.50/GJ flat gas price is 40% versus 13%, respectively. We’d see the same kind of improvement for a Wilrich or a Falher well.
Our Cardium wells would also improve but they are less sensitive to just gas price increase since they have higher liquid yields. What this means is we can now justify adding several additional plays to our rig schedule. The increased free cash flow from the unhedged production should also result in additional debt repayment and decreasing debt to cashflow ratios. While this new protocol is only in effect for October 2019 and summer (April-October) 2020, the entire AECO forward curve continues to strengthen as a result. That’s because for this winter, AECO connected storage levels are already dangerously low and will be completely empty when we get around to refilling them next summer. I refer to AECO connected storage rather than Western Canadian storage (like most reports do) because storage pools like Aiken Creek in BC and North Battleford in Sask. don’t really affect the AECO market so they shouldn’t be included. Figure 2
Last spring, AECO storage was effectively “empty” when levels got to 225 BCF. That’s because the USJR storage pools (Figure 3) are no longer effective due to a lack of Interruptible Receipt service (IT-R). Dimsdale (105 BCF), Edson (50 BCF), Carrot Ck (35 BCF), and Brazeau (33 BCF), collectively 223 BCF, are all basically “full” and can’t empty because that portion of the Nova system is over contracted with FT-R and there hasn’t been meaningful IT-R available to storage operators for several years. In fact, on average over the last two winters, IT-R was only available in USJR on 24 days out of the 151 days of winter, and only at an average of 12% on those days. In other words, for only 2.9 days of the winter could USJR storage contribute. Based on our projected refill, we’ll only have approximately 65 BCF of “useable” EGAT storage until we’re back to the empty line. That’s not a lot, considering in the last two winters we needed 162 BCF and 136 BCF, respectively. That’s why the TSP is such a big deal. Empty supplies this winter, followed by stronger demand next summer to refill storage, and then an expanded system in 2021 will ensure AECO will be a fair gas market once again. Which is why Peyto is actively increasing our AECO exposure.