Canada’s natural gas sector, once poised for a lucrative future with the opening of the much-anticipated liquefied natural gas (LNG) export terminal, is now grappling with a major issue: oversupply. The new LNG Canada terminal, led by Shell and set to begin operations next year, is expected to boost natural gas demand significantly. However, a glut of stored gas and increased drilling activity ahead of the terminal’s launch may stifle any sharp rise in prices. The situation is creating frustration among producers and analysts alike, as the promise of higher prices and increased demand is overshadowed by an overwhelming supply of gas.
LNG Canada: A Game-Changer with Lingering Doubts
LNG Canada, a monumental project located on the British Columbia coast, is Canada’s first major liquefied natural gas export terminal. The facility, which is expected to handle 14 million tons of liquefied gas per year, is a joint venture between global energy giants like Shell, Japan’s Mitsubishi Corp, and Malaysia’s state-owned energy firm Petronas. This venture represents a significant milestone for Canada, a country rich in natural gas reserves but lacking substantial export infrastructure.
The LNG Canada terminal will require about 2.1 billion cubic feet per day (bcf/d) of natural gas to meet its operational needs, a substantial demand boost for Canadian gas producers. Despite this seemingly promising future, analysts warn that the anticipated rise in natural gas prices may not materialize as quickly as hoped. The Canadian gas market is currently flooded with excess supply, and this oversupply is depressing prices and causing logistical challenges for producers.
AECO Gas Prices at Historic Lows
At the core of this issue lies the AECO hub, Alberta’s primary natural gas pricing point. In late September, prices at AECO plummeted to just 5 Canadian cents per million British thermal units (mmBtu), marking a two-year low. The rapid decline in prices has hurt Canadian producers, who had ramped up drilling activity in anticipation of the increased demand expected from LNG Canada. Many companies are now facing difficult decisions as the market struggles to absorb the surplus gas.
Storage facilities across the region are nearly full, which has exacerbated the problem. With no room left for more gas, producers are being forced to either sell their output at a loss or curtail production until prices recover. This situation has created tension within the industry, as some companies choose to cut back while others continue to flood the market, further driving down prices.
Production Curtailments and Delayed Completions
In response to the price slump, a number of major Canadian gas producers have announced temporary curtailments in their output. Executives estimate that firms have cut production by between 800 million and 1 billion cubic feet per day (bcf/d), which accounts for roughly 5% of Canada’s total gas production. Among those making cuts is Advantage Energy, a Calgary-based company that recently announced it would curtail up to 130 million cubic feet per day of dry gas production. The company made this move in an effort to limit its exposure to low prices and wait for a more favorable market environment.
Michael Belenkie, CEO of Advantage Energy, voiced his disappointment with the current state of the market, particularly the fact that some producers are continuing to sell gas at a loss. “Producers basically started to front-run the growth in demand,” he said, expressing frustration that some firms are not curbing their production, which would help prices recover faster. Belenkie noted that while LNG Canada will provide substantial off-take from the system, it won’t happen immediately. “In three, six, nine months we will see substantial off-take from the system, but people have delivered early,” he added.
Similarly, other companies like Canadian Natural Resources Ltd have chosen to delay the completion of newly drilled wells, holding off until prices improve. By postponing the completion process, these firms hope to avoid further flooding the market with gas at a time when prices are near rock-bottom.
LNG Canada’s Impact on Future Prices
Even with the expected demand surge from the LNG Canada terminal, analysts remain cautious about the potential for a sharp rise in natural gas prices. Futures markets are forecasting relatively modest price gains, with AECO prices projected to reach only C$2.46 per gigajoule (C$2.33/mmBtu) by September 2025. This is around C$1.20 per gigajoule lower than what the forward market was indicating just a year ago.
Jean-Paul Lachance, CEO of Peyto Exploration, one of Canada’s largest natural gas producers, noted that the forward strip for natural gas prices has come down significantly. “Right now, prices are not signaling there’s going to be a big windfall in 2025,” he said, pointing to growing concerns that the benefits of LNG Canada may take longer to materialize than initially anticipated. Lachance added that many in the industry now believe LNG Canada will not fully ramp up until the second half of 2025, meaning that the anticipated price recovery could be delayed by several years.
Peyto, like many other producers, has hedged a significant portion of its production to protect against the ongoing volatility in the market. Lachance expressed concern that some companies might restart curtailed volumes too quickly when prices improve, leading to another round of oversupply and price suppression. This underscores the delicate balance that Canadian natural gas producers must strike in the coming months as they navigate an uncertain and highly volatile market environment.
The Broader Context: Global LNG Market Dynamics
Canada’s natural gas struggles are not happening in isolation. The global LNG market has experienced significant growth in recent years, driven by increased demand from Asia and Europe. Countries like Japan, South Korea, and China have become major consumers of LNG as they transition away from coal and seek more environmentally friendly energy sources. At the same time, Europe has ramped up its LNG imports as it seeks alternatives to Russian gas in the wake of the Ukraine conflict.
However, the global LNG market is also facing its own set of challenges, particularly an oversupply of LNG in certain regions. New LNG export projects in the United States, Australia, and Qatar have come online, flooding the market with additional supply and putting downward pressure on prices. Canada’s entry into the LNG market, while significant, may not be enough to dramatically shift the global pricing dynamics, especially if the current oversupply persists.
Moreover, with countries worldwide investing in renewable energy sources and aiming to meet net-zero carbon emission goals, the long-term future of natural gas as a major energy source remains uncertain. As demand for cleaner energy alternatives grows, natural gas producers will need to adapt to changing market conditions and explore ways to remain competitive in a rapidly evolving energy landscape.
The Road Ahead for Canadian Producers
As Canada prepares to enter the global LNG market with the opening of LNG Canada, its natural gas producers face a complex and uncertain future. The promise of increased demand and higher prices is tempered by the realities of a flooded market, low storage capacity, and ongoing price volatility. While curtailments and delayed completions may offer short-term relief, the long-term outlook for Canadian natural gas producers will depend on how quickly LNG Canada can ramp up operations and absorb the surplus gas.
In the meantime, companies will need to navigate the challenges posed by oversupply and manage their production levels carefully to avoid further depressing prices. Hedging strategies, like those employed by Peyto Exploration, will be critical in mitigating risk and protecting against sudden price swings. Ultimately, the success of Canada’s natural gas industry will depend on its ability to strike a balance between supply and demand while adapting to the broader shifts in the global energy market.
Despite the current hurdles, the launch of LNG Canada represents a significant milestone for the country’s energy sector. As the terminal comes online and begins exporting natural gas to global markets, Canadian producers will have new opportunities to capitalize on rising international demand. However, the road to sustained price recovery will likely be long and fraught with challenges, requiring careful planning and coordination across the industry.
In the end, Canadian natural gas producers will need to remain flexible and resilient as they navigate this period of transition. With the right strategies in place, they can weather the current storm and position themselves for long-term success in the global LNG market.
Syed Raiyan Amir
Senior Research Associate/ Research Manager
The KRF Center for Bangladesh and Global Affairs (CBGA)
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