Natural Gas Prices Under Pressure From Soaring U.S. Demand

An LNG tanker is guided by tug boats at the Cheniere Sabine Pass LNG export unit in Cameron Parish, La., on April 14, 2022.

U.S. natural-gas prices have hit their highest level in 14 years as North American producers scramble to replenish supplies with demand soaring and storage levels declining.

As Europe seeks to reduce its energy dependence on Russia, the United States has been increasing its exports of liquefied natural gas to European markets. U.S. spot prices have almost tripled over the past year, spiking even higher after the Ukraine war in February.

“Europe is very hungry for natural gas, especially since they have to displace Russian gas,” said Darren Gee, chief executive officer at Calgary-based Peyto Exploration and Development Corp.

In Canada, where natural gas trades at a discount to the U.S. market, prices have also surged.

Canada doesn’t have any LNG export terminals, but the impact of rising U.S. shipments to Europe has had a ripple effect by raising demand for Canadian natural gas in the United States. Higher commodity prices could also make it more economically viable for LNG proposals, including those in Canada, to proceed.

The combination of unprecedented demand and limited supply could mean high prices for natural gas for a sustained period stretching at least into 2023 in the cyclical industry, say producers and industry analysts. Given current trends, Canadian consumers could be in for sticker shock when they see their home heating bills later this year.

For the producers, the pricing rally marks a dramatic turnaround compared with the six-year period from 2015 to 2020, when natural-gas markets in North America were in the doldrums.

After COVID-19 pandemic restrictions began easing in 2021, global demand for natural gas gradually picked up. Spot prices for natural gas at Henry Hub in Louisiana, the U.S. benchmark, have doubled since early 2022, when Russia continued to mass troops near Ukraine.

Henry Hub prices have slipped since early May, yet remain at lofty levels. “The commodity continues to settle at levels not seen since 2008,” National Bank Financial said in a research note.

The U.S. futures contract for June delivery closed at US$8.06 per million British thermal units (BTU) on Friday, compared with about US$2.70 in the spring of 2021.

In Canada, the Alberta benchmark has been volatile recently, but spot prices have averaged $7.31 per million BTU so far in the second quarter, compared with $3.10 in last year’s second quarter, according to Stifel FirstEnergy.

Prices have also been pushed up because storage levels for the commodity in Canada and the United States are at below-average levels this spring.

The U.S. Energy Information Administration estimates that storage of the fuel in the U.S. is 15 per cent below the five-year average for 2017 to 2021.

In the integrated continental market, Ontario and Quebec buy natural gas from Western Canada and the United States, while producers in British Columbia and Alberta pipe the fuel east to Central Canada and also south of the border.

“The U.S. and Canada already have a long-standing trade relationship that includes a highly integrated natural-gas system,” said Lisa Baiton, who became president of the Canadian Association of Petroleum Producers earlier this month.

Producers caution that disruptions to the supply chain and continuing labour shortages have contributed to the inability of companies to drill aggressively. Most companies are drilling just to maintain their production and are not necessarily focused on growing output significantly because there are other options such as paying down debt and buying back shares.

Industrial users of natural gas in Canada such as power plants, the oil sands, petrochemical facilities and pulp mills are starting to feel the pinch. They are becoming increasingly concerned about higher fuel expenses. Still, many manufacturers have fixed-priced contracts and haven’t yet put inflationary fuel prices at the top of their list of pressing concerns.

For consumers, options vary from province to province when it comes to signing up with fuel marketers for fixed-priced plans versus staying with variable rates. Since natural-gas consumption plummets in the summer and soars in cold weather, most Canadian households won’t likely pay much attention to the impact of higher prices until the winter of 2022-23.

The United States, the world’s largest producer of natural gas, edged out Qatar and Australia earlier this year to become the planet’s biggest exporter of LNG.

Demand for natural gas is expected to continue rising in the years ahead in North America, with the fuel going to additional LNG export terminals in the United States and the first one set to open in Canada.

LNG Canada’s $18-billion terminal is under construction in Kitimat, B.C., with the goal to begin exports to Asia in 2025 in what would be Canada’s first site for shipping the fuel on ocean-bound LNG vessels.

LNG dreams endure in Canada, given that spot prices for LNG in Europe and Asia are more than US$22 per million BTUs. Dave Humphreys, executive vice-president of operations at Birchcliff Energy Ltd. of Calgary, said Canada remains overly dependent on U.S. markets.

“The U.S. seems to control our destiny, so we need to get more world markets,” he said.

Andy Mah, a member of the board of directors at Calgary-based Advantage Energy Ltd. and its former CEO, said he is optimistic about the prospects for Rockies LNG in British Columbia, despite the challenges. Backed by Advantage, Birchcliff, Peyto and four other producers, Rockies LNG is proposing to build the Ksi Lisims LNG project, which would be a floating export facility in an area in northern B.C. owned and controlled by the Nisga’a Nation.

“It’s incumbent on companies to come up with the plans and up to government to facilitate and help move business concepts and ask whether a project is for the good of Canada, not for the good of votes,” Mr. Mah said in an interview, after he spoke at the recent Canada Gas & LNG Exhibition and Conference in Vancouver.

On the East Coast, Pieridae Energy Ltd. is hoping its much-delayed Goldboro LNG project in Nova Scotia will finally forge ahead with construction within a year and begin exporting LNG to Europe in 2027.

Industry analysts say East Coast proposals hinge largely on whether the federal government intervenes and provides incentives for TC Energy Corp. to upgrade and expand its pipeline system in Ontario and Quebec, in order to make it possible to transport sufficient amounts of natural gas from Alberta to the East Coast.

Canada is the world’s sixth-largest natural-gas producer, yet LNG proposals are stalled. Pieridae CEO Alfred Sorensen said Ottawa could help speed up the regulatory process on the pipeline side. “The federal government has to do something to convince TC Energy,” Mr. Sorensen said.

But the federal government has indicated that it’s up to LNG proponents to figure out ways to overcome pipeline constraints.

“Project investment decisions will be made by proponents based on their ability to comply with federal and provincial regulatory standards while competing within the global market,” said Ian Cameron, director of communications for Jonathan Wilkinson, the federal Natural Resources Minister.