Today’s blog on widening AECO differentials is a followup to last night’s blog “NGTL’s USJR Outages to Impact Q2/Q3 Production, Lack of New Q4 Capacity Expected To Push Back H1 IPOs” {LINK]. NGTL outages impact AECO differentials and we expect to see AECO differentials hurt (widen) this summer with the NGTL outages highlighted in our blog last night. But we remind that the recent widening AECO differential is also impacted by other factors ie. REX Zone 3 expansion.
AECO differentials have widened in the past few months. There are a multitude of factors that impact AECO prices relative to HH. But we believe two of the key factors were the NGTL outages in Nov/Dec 2016, and the startup of REX Zone 3 expansion in early Jan. The below graph shows the HH less AECO differentials in US$ since Oct 1, and it shows how HH has dramatically outperformed ie. the differential widened.
HH Less AECO Differentials (US$)
Source: Bloomberg, Stream Asset Financial
NGTL Nov/Dec 2016 outages impacted AECO. The NGTL monthly outage forecast is their customer notice that goes out each month for forecast outages on the NGTL pipeline, which is the Alberta natural gas pipeline system within TransCanada. Last week, NGTL published its Jan monthly outage forecast [LINK]]. Our blog last night highlighted the forecast outages of ~0.8 bcf/d in June and ~1.8 bcf/d in Aug. But the forecast graphs also show the historical outages for the past 6 months. NGTL notes that there were outages for most of Nov and Dec 2016, and that the outages were as high as ~0.6 bcf/d.
NGTL – Outage Actuals And Forecast For Upstream James River Receipt Area
Source: NGTL
REX Zone 3 expansion start in Jan is impacting AECO. Our Jan 29, 2017 Energy Tidbits memo highlighted “Tallgrass REX Zone 3 expansion added 0.8 bcf/d to Midwest”. We noted the Jan 5 press release from Tallgrass Energy and wrote “that it had completed its REX zone 3 capacity enhancement project a few days late but it had started up and added 0.8 bcf/d of capacity to REX Zone 3. REX is significant as any added capacity on REX is a negative to Cdn natural gas as it increases competition in the US Midwest. Tallgrass said it can now move “2.6 billion cubic feet per day of natural gas from Clarington, Ohio, to delivery points as far as Mexico, Missouri”. [Note, Mexico is a delivery point in Missouri]. The significance is that it brings more Marellus/Utica gas to the Midwest. Our Jan 1, 2017 Energy Tidbits noted how the potential delay of the 3.25 bcf/d Rover pipeline will be positive to Cdn natural gas as it means that there will less Marcellus gas to Ontario and, importantly, to the US Midwest”.
We love feedback on our research. We have learned over almost two decades of research that a call today can change tomorrow if facts, assumptions or circumstances change. Last night’s blog generated a lot of comments and followup dialogue with us this morning. We noted the REX expansion and were reminded that the REX expansion has reportedly not led to increased Marcellus volumes ie. it didn’t add 0.8 bcf/d to US gas supply to markets. We had seen the same views of no immediate increase to the Marcellus supply, but also that these views noted that the Marcellus supply was preferentially moving to REX ie. moving to Midwest to competed against Cdn natural gas.
Rockies Express Pipeline Map
Source: Rockies Express Pipeline
Looking ahead, we expect the NGTL outages forecast for the summer to also impact AECO differentials. Most will remember the Q2/15 reporting season, when Canadian producers highlighted the impact of NGTL outages on volumes and AECO prices. Last night’s blog wrote “The bad news is that there will be some big curtailments coming in Q2/17 and even moreso in Q3/17. NGTL estimates curtailments to hit 0.8 bcf/d in Q2, and ~1.8 bcf/d in Q3/17. It is also important to note that NGTL says the Q3/17 curtailments will impact both interruptible and firm transportation”.
As we wrote last night, we expect producers to reflect the relatively new NGTL outage forecast in their 2017 guidance. The forecast for a USJR ~1.8 bcf/d outage in Aug was only released by NGTL just before Xmas so may have got missed in the Xmas break. The reminder of Q2/15 reporting wasn’t that long ago, so we expect producers to look at the potential impact on NGTL outages on volumes and AECO prices. Regardless, we remind that a gas curtailment due to a pipeline outage does not impact the quality, value or production potential of a natural gas asset. It’s a number impact.