Alberta’s natural gas industry is producing at impressive levels, but one of the most important energy stories this summer is not how much gas is coming out of the ground.
It is what that gas is worth once it reaches the Alberta market.
Recent second quarter results from several Western Canadian producers show that the AECO natural gas benchmark remained weak during the spring and early summer. One Alberta focused producer reported an average AECO monthly benchmark of only about $1.43 per gigajoule during the quarter, while other producers reported similarly soft local benchmark pricing.
For people working in Alberta’s natural gas industry, this matters.
Low local gas prices can influence drilling schedules, capital budgets, processing decisions and ultimately the amount of work available to drilling contractors and other oilfield service companies.
But something else is happening at the same time.
Alberta producers are becoming increasingly sophisticated about avoiding complete dependence on the local AECO market.
That could have important consequences for the future of natural gas development around Grande Prairie, west central Alberta and Calgary.
What Is AECO?
AECO is the most important natural gas pricing reference in Alberta.
When people talk about the Alberta natural gas price, they are often referring to an AECO benchmark.
The name is historical, but today the benchmark is associated with the large natural gas pipeline system connecting Alberta production with customers and other markets.
It is important to understand that AECO is not the universal price of natural gas.
Natural gas trades at different prices in different locations.
Gas in Alberta can be worth something different from gas delivered into Ontario, the United States or overseas markets.
That difference is becoming extremely important to Alberta producers.
Why Can Alberta Natural Gas Become So Cheap?
Alberta has an enormous natural gas resource.
That is obviously an advantage.
But producing a lot of something does not automatically guarantee a high price.
Natural gas needs a customer.
If production is strong while local demand or transportation capacity is constrained, producers can compete with each other for available market space.
That can push the local price downward.
Pipeline maintenance can also temporarily affect the amount of gas that can move through parts of the system.
Weather matters as well.
A cold Alberta winter creates substantial heating demand. Warmer periods can reduce that source of consumption, although electricity generation and industrial facilities also consume large quantities of natural gas.
The result is a market where prices can change quickly even while the physical wells continue producing.
Alberta Producers Are Finding Ways Around the Problem
Recent corporate results provide a good example of how the industry is adapting.
Some producers are selling portions of their natural gas into markets outside Alberta.
Others use financial contracts to reduce their exposure to weak AECO prices.
Some are signing long term agreements linked to entirely different pricing benchmarks.
The objective is diversification.
A producer does not necessarily want the economics of its entire drilling program determined by one regional natural gas price.
This summer, that strategy has been particularly valuable.
Peyto Exploration, for example, reported that its realized natural gas price after hedging and diversification was more than twice the average AECO monthly benchmark during its second quarter. Birchcliff and Pine Cliff also reported marketing or hedging strategies that helped them realize prices above local Alberta benchmarks.
The individual company results are less important than the broader trend.
Alberta natural gas producers are increasingly trying to sell into multiple markets.
This Matters to Grande Prairie
Grande Prairie sits near some of Alberta’s most important natural gas producing areas.
Development around the region supports drilling contractors, hydraulic fracturing companies, coiled tubing providers, trucking businesses, pipeline contractors and gas processing operations.
If natural gas prices become too weak for too long, producers can eventually reduce capital spending.
That can mean fewer wells.
Fewer wells can mean less work for the service companies surrounding Grande Prairie.
The relationship is not immediate because companies establish capital programs in advance and can protect future revenue through hedging.
But commodity prices eventually influence investment.
That is why someone running an oilfield business in Grande Prairie should care about AECO even if they never personally buy or sell natural gas.
Why Producers Do Not Simply Stop Drilling
If Alberta natural gas prices are weak, it might seem logical for producers to immediately stop drilling.
The business is more complicated than that.
A producer may have already protected part of its future production at higher prices.
It may have transportation arrangements allowing gas to reach a stronger market.
Some wells produce valuable condensate and natural gas liquids alongside the gas.
Companies also need to think several years ahead.
A well drilled today may produce for many years, so its economics are not determined solely by the natural gas price during the month when the drilling rig arrives.
This helps explain why substantial natural gas development can continue even during periods of disappointing AECO prices.
Liquids Can Make an Alberta Gas Well More Attractive
Not every natural gas well produces only gas.
This is especially important in western Alberta.
Some reservoirs produce condensate and other natural gas liquids alongside the gas stream.
Condensate has a particularly useful market in Alberta because it can be blended with heavy bitumen to help it move through pipelines.
That means the economics of a liquids rich well can be quite different from those of a dry gas well.
When natural gas prices weaken, the liquids produced alongside the gas can become even more important to the economics of certain drilling programs.
This is one reason areas containing both natural gas and valuable liquids continue attracting industry investment.
LNG Is Starting to Change the Western Canadian Gas Story
Canada’s emerging LNG export industry adds another potential destination for Western Canadian natural gas.
Historically, Alberta gas depended heavily on customers within Canada and the United States.
Pacific Coast LNG facilities create another route.
Western Canadian gas can move west through pipelines, be liquefied on the British Columbia coast and then transported by ship to international customers.
This does not mean every Alberta producer suddenly receives an international LNG price.
Transportation arrangements, contracts and pipeline access still matter.
But the broader significance is difficult to ignore.
Western Canada now has an additional source of natural gas demand that did not exist at meaningful scale before LNG exports began.
Producers Are Looking Even Farther Ahead
Some Alberta producers are already arranging future sales that connect their gas economics with markets far beyond the province.
Peyto recently disclosed a long term natural gas supply agreement that is expected to begin later this decade and will be linked to European natural gas pricing.
Interestingly, the physical delivery point remains at Alberta’s AECO hub.
The pricing arrangement, however, provides exposure to a European benchmark after applicable deductions.
This demonstrates how sophisticated the natural gas business has become.
A molecule of gas does not necessarily need to physically travel from an Alberta well all the way to Europe for an Alberta producer to gain commercial exposure to a European market.
Contracts can create that connection.
Why This Matters to Calgary
Calgary is where much of this strategy is developed.
Natural gas marketing is a major part of running an energy company.
Companies need people who understand pipeline transportation, commodity trading, hedging, contracts and regional pricing.
A producer may operate wells hundreds of kilometres from Calgary while employees downtown determine where the gas will be sold and how price risk will be managed.
This is another example of why Calgary remains important to Alberta energy even though most drilling occurs elsewhere.
Modern oil and gas companies do not simply produce hydrocarbons.
They need to optimize how those hydrocarbons reach customers.
Weak Gas Prices Can Actually Encourage Infrastructure Investment
There is another side to low AECO prices.
A large supply of relatively inexpensive natural gas can make Alberta attractive to industries that consume significant amounts of energy.
Petrochemical facilities are one example.
Gas fired electricity generation is another.
Proposed data centres have also become part of Alberta’s energy discussion because large computing facilities require substantial and reliable electricity supplies.
New industrial demand could potentially absorb more Alberta natural gas over time.
That would be important for producers because the strongest solution to excess supply is ultimately more demand or greater access to outside markets.
Gas Processing Is Becoming More Important Too
Growing natural gas production creates another opportunity for Alberta.
Raw natural gas often needs to be processed before it can enter major transmission systems.
Depending on the production stream, processing can remove water and unwanted components while also recovering valuable liquids.
More drilling can therefore create demand for additional processing capacity.
Existing plants also require maintenance and optimization.
This creates work for instrumentation technicians, electricians, mechanics, engineers, pipeline contractors and other industrial trades.
The employment story surrounding natural gas is therefore much broader than drilling rigs.
What Should Alberta Oilfield Workers Watch?
For workers, the most useful question is not whether AECO goes up or down on any particular day.
Short term commodity prices can be extremely volatile.
The more important thing to watch is how producers respond.
Are companies reducing their drilling plans?
Are they maintaining their capital budgets?
Are they building additional processing infrastructure?
Are they signing agreements to reach different markets?
Are new LNG connections creating additional demand?
Those decisions eventually determine how much work reaches the field.
Recent producer results show that companies are still investing while actively protecting themselves from weak local gas prices. Peyto reported production growth despite slowing some capital activity during a wet spring and early summer, while Birchcliff reported strong current production after completing planned plant work and optimization projects.
That is a more useful indicator than looking at AECO alone.
Alberta Natural Gas Is Becoming a Market Access Story
For years, discussions about Alberta natural gas focused heavily on how much resource existed underground.
There is little doubt about the size of the resource.
The more interesting question today is where all that gas will go.
Some will continue supplying Alberta homes and businesses.
Some will generate electricity.
Some will support industrial facilities.
Some will move into Eastern Canada and the United States.
Some Western Canadian gas will ultimately support LNG exports from the Pacific Coast.
And producers are increasingly using commercial arrangements that expose them to prices far beyond Alberta.
That transition matters for workers.
A producer with more ways to sell its gas can be better positioned to continue investing when the local market becomes weak.
Continued investment means drilling.
Drilling means completions.
Production requires processing.
Processing requires pipelines and facilities.
And all of that infrastructure requires people to build, operate and maintain it.
The Current Weakness Does Not Tell the Whole Story
Weak Alberta natural gas prices this summer are a genuine challenge.
They should not be ignored.
But they also should not automatically be interpreted as evidence that Alberta’s natural gas industry is entering a major decline.
Production remains strong. Companies continue developing important western Alberta resources. Producers are diversifying where they sell their gas, and Canada’s LNG industry is creating another potential source of long term demand.
For people working around Grande Prairie and other natural gas producing regions, the next important development may therefore be less about discovering another giant gas field.
Alberta already has the gas.
The bigger opportunity is creating enough pipelines, processing capacity, industrial demand and access to outside markets to ensure that producing it remains worthwhile.
That is increasingly where the future of Alberta’s natural gas business will be decided.