A Big Positive To Mid Term AECO Gas Prices With TransAlta’s Accelerating Transition To Clean Power

Apr 21, 2017


There was big positive news for AECO gas prices on Wed when TransAlta announced it was accelerating its transition to clean power in Alberta [LINK].  This is their transition out of coal.   Their announcement is significant because it specifically says natural gas is directly replacing coal in powering certain coal units.  TransAlta says they a converting “Sundance Units 3 to 6 and Keephills Units 1 and 2 from coal-fired generation to gas-fired generation in the 2021 to 2023 timeframe, thereby extending the useful life of these units until the mid-2030s; and effective immediately, taking steps to secure the gas supply required for the converted units (expected to be up to 700 million cubic feet of gas per day at peak levels of demand), including the construction of the required pipeline.” A peak of up 0.7 bcf/d of new natural gas demand for TransAlta is a big plus for AECO starting in 2021.

There will likely be more conversions from coal to natural gas, which would increase the direct replacement of coal by natural gas in baseload power.  Sundance Unit 1 and Sundance Unit 2 are part of TransAlta’s baseload power supply.  TransAlta said it was retiring Sundance Unit 1 effective Jan 1/2018, and “mothballing “ Sundance Unit 2 effective Jan 1/2018 for up to 2 years.  But there is a key caveat, as TransAlta “TransAlta intends to apply to the federal Minister of Environment to extend the life of Sundance Unit 2 from 2019 to 2021. This will provide the Company with flexibility to respond to the regulatory environment for coal-to-gas conversions and the new Alberta capacity market.”  This means that Sundance Unit 2 may end up like Units 3 to 6 and ultimately be converted to natural gas fuel from coal.

It materially increases Alberta’s provincial natural gas demand.  Our March 15, 2017 Energy Tidbits memo [LINK] noted the just released Alberta Energy Regulator data on 2016 natural gas statistics in Alberta.  The AER noted the milestone reached in 2016 when “Alberta became its own largest market as provincial demand accounted for an estimated 50.5 per cent of Alberta production, driven primarily by demand from the oil sands and the electricity generation sector.”  AER notes that Alberta’s marketable natural gas production in 2016 was 10.4 bcf/d, 5.1 bcf/d was exported out of Alberta. Adding 0.7 bcf/d of peak natural gas demand (and likely some future baseload with Sundance Unit 2 potential conversion) is material relative to the 5.3 bcf/d natural gas consumed in 2016 in Alberta.   Perhaps more significantly, the big growth area for natural gas demand is oil sands, so the TransAlta conversions will replace a lot of any oil sands growth that doesn’t go ahead.  A rule of thumb we use for oil sands mining is 0.8 mcf of natural gas used per 1 barrel of oil sands mining barrel.  So to the extent any delays are oil sands mining projects, 0.7 bcf/d of natural gas demand would be the equivalent of 875,000 b/d of oil sands mining growth demand for natural gas.

AER: Alberta Marketable Gas Removals and Demand By Sector

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Source: AER

AER: Alberta Marketable Gas Removals and Demand By Sector

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Source: AER

There were two positives this week ffor the mid term outlook for AECO gas prices.  Our blog yesterday “If LNG Markets Tip To Undersupply In 2020/2021, It Should Impact Cdn Natural Gas In 2018 and 2019”  [LINK] highlighted the LNG insights from Cheniere’s analyst day including it being the latest to come out with the LNG outlook support for its call that LNG oversupply will be fixed in 2020 and 2021.  We saw this as a positive to the tone and valuations for natural gas, including Cdn natural gas, as investors see the potential fixing of LNG oversupply earlier than expected. Then we saw TransAlta’s announcement this week on its coal to gas conversions and how this will add peak demand of 0.7 bcf/d in 2021.  We also see it likely that TransAlta will end up converting other coal generators (Sundance Unit 2) that will add to the 0.7 bcf/d.  These are direct substitution of natural gas for coal and are positive for mid term AECO.   Its another reason to it is timely to look at the mid term fundamentals for natural gas now, as an increase in the midterm strips for HH and AECO will ultimately flow back into the tone and valuations for Cdn natural gas and we would expect analysts and investors to take a new look at their 2018 and 2019 natural gas thesis in Q3/17, ahead of going into the winter.