COMMODITIES 2025: Western Canadian gas producers hope for better after difficult year

Natural gas producers in Western Canada faced multiple headwinds in 2024 of stagnating demand, low prices, significant shut-ins and overflowing inventories. But while 2025 holds the promise of improved market conditions -- driven by the start of full commercial operations at LNG Canada -- challenges remain with pricing.

"Next year [2025] should be a better year for gas producers compared with 2024, but maybe not as good as they are hoping it will be," Ian Archer, global gas director of S&P Global Commodity Insights, said. "The biggest story for 2025 will be LNG Canada and the significant feedgas demand that will be created. The factor to watch will be the demand and supply scenario in the Western Canadian Sedimentary Basin and its impact on pricing."

AECO-NIT cash prices are weaker through 2025, as a late start to winter, strong production and pipeline exports, as well as a potential delay to LNG Canada's startup all weigh on fundamentals, Commodity Insights said in its latest 'North American Natural Gas Short-Term Outlook' in December.

"We are now anticipating winter 2024–25 AECO prices will average US$1.73/MMBtu or US$0.39/MMBtu below last month's outlook and lower than last winter's," the outlook said, adding: "There remains a potential for further price declines as the average price is dependent on the normalization of winter weather and increased feedgas volumes for LNG Canada, which currently remain very low."

LNG Canada is the Shell-led 14 million mt/year facility at Kitimat in British Columbia that is undergoing startup, with first export cargoes due by summer 2025.

Natural gas prices in Western Canada will remain under pressure, the Alberta government said in its latest Fiscal Update and Economic Statement issued late November, noting AECO has held mostly below C$1 ($0.69)/MMBtu since the spring. The Alberta Reference Price is now forecast to average C$1.20/MMBtu in fiscal 2024-25 (April-March), the provincial update said.

Price volatility, record 2024 output

"The wildcard is LNG Canada. It has started receiving feedgas, but we understand it is still minimal volumes, with the expectation of demand picking up mid-January to mid-February," Archer said, pointing out that such a scenario is typical of new gas liquefaction trains.

"The startup of LNG Canada is unlikely to be smooth, and there will be periods of intermittent production variations to test the system. Overall, the startup is a good thing but will add to the price volatility," he said.

Besides LNG, there is also a case of domestic gas demand growing by between 200 MMcf/d to 400 MMcf/d in 2025 with a return of normal winter weather that should boost demand for home heating and also incremental demand from oil sands producers that are increasing output with the startup of the 590,000 b/d Trans Mountain Expansion oil pipeline from Alberta to British Columbia, Archer said.

Also, in late December the federal government-owned Impact Assessment Agency of Canada said Calgary-based natural gas and NGL producer Kiwetinohk Energy has proposed the construction and operation of a new natural gas-fired power generation plant at Swan Hills in Alberta.

For 2025, Commodity Insights is anticipating Western Canadian gas prices to be US$2.30/MMBtu to US$3.00/MMBtu, Archer said.

Producers upbeat despite headwinds

Western Canadian production was forecast to end 2024 at 18.4 Bcf/d, with that momentum to continue and grow into 2025 and reach 19.2 Bcf/d, Archer said.

Also, net pipeline exports to the US Lower 48 in 2024 are expected to average 5.7 Bcf/d, the Commodity Insights outlook said.

Lastly, inventory levels in Alberta that blew through capacity stood at 500 Bcf at the latest count at the end of October, Archer said.

"We see it being drained down with winter. Yet the levels are substantially elevated historically. We anticipate it will take at least a year to work through these inventories and that's another headwind that will impact prices as a lot of gas will be available in storage," he said.

Total Canadian gas demand (including exports) in winter 2024–25 is expected to average a record 22.1 Bcf/d, driven by robust pipeline exports to the US Lower 48, normal heating loads and the start of material feedgas deliveries to LNG Canada, the Commodity Insights short term outlook said.

Assuming normal weather, residential-commercial demand is projected to average 5.4 Bcf/d, which will be up 700 MMcf/d year over year, it said, noting strong demand in the US Lower 48 in winter 2024–25 is expected to lift Canadian pipeline exports by 700 MMcf/d year over year to 6.1 Bcf/d.