Is Natural Gas So Cheap Producers Have to Pay People to Take It?
by Bob Shively, Enerdynamics President and Lead Facilitator
Natural gas prices have fallen to historic lows with the rise in shale gas production. After experiencing a period of high gas prices in the late 2000s, today’s gas consumers have gotten used to prices commonly below $3.00/MMBtu:
Source: EIA Natural Gas Weekly Update
This is great for consumers but not so great for producers who often depend on market-based gas prices to cover their costs and provide a profit. In Canada, things have gotten even worse for producers. The following graph shows prices at the Alberta AB-NIT market hub (also known as AECO-C). Notice prices for May 4-6:
Source: Gas Alberta Inc.
On these days, natural gas prices have gone below zero meaning that producers must pay market participants to take gas off their hands.
So why would anyone pay someone to take natural gas? As we teach in Enerdynamics’ various courses that discuss gas pricing, prices at any given time and any given location are a result of multiple factors:
In the case of recent prices in Alberta, it is about supply, demand, transportation capacity, and storage capacity. Supply in Western Canada has increased recently, with production showing a 3.6% boost between 2016 and 2017. This is due to robust success in gas exploration and the fact that some producers continue to expand based on revenues from natural gas liquids or associated oil.
Demand on the other hand has not seen much increase. Lack of export growthspecially problematic for producers is lack of export growth. Exports to the U.S. in 2017 were essentially at the same level as in 2012. Meanwhile, attempts to get LNG export projects launched have so far been unsuccessful. Lastly, there is only one key pipeline that moves Alberta gas to the east – TransCanada Pipeline – and it has been undergoing maintenance that has restricted capacity while storage has remained near full.
Producers are left with a dismal choice: shut-in wells or take whatever price is necessary to allow their production to flow into the pipeline. For some, the cost of shutting down may be higher than a few days of paying someone to take your gas. For others, the loss of NGL or associated oil revenues may not justify shutting-in. Either way, gas continues to flow and prices continue to drop until demand increases, supply drops, or takeaway capacity is restored.
For those wanting to learn how commodity markets behave, Western Canada has been a perfect example of how fundamentals drive price movements.
Back to blog home page