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AECO gas prices hit a two-year low in late September on

strong

supply, brimming storage inventories

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Producers curtail up to 1 bcf/d due to low prices

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LNG Canada export facility due to start operating next

year

By Nia Williams

Oct 11 (Reuters) - A huge liquefied natural gas export

terminal led by Shell, called LNG Canada, may struggle

to dramatically raise Canadian natural gas prices when it starts

operating next year because a flood of pent-up supply is waiting

to hit the market, analysts said.

Gas prices at Alberta's AECO hub hit a two-year

low of 5 Canadian cents per million British thermal units

(mmBtu) in late September as storage filled up. The slump has

hurt producers who boosted drilling activity this year in

anticipation of new demand from LNG Canada and prompted some

firms to curtail production.

Company executives and analysts estimate firms have shut in

between 800 million and 1 billion cubic feet a day (bcf/d),

around 5% of total gas production from Canada, the world's

sixth-largest producer.

In addition to curtailments, some producers like Canadian

Natural Resources Ltd ( CNQ ) have delayed completing newly

drilled wells until prices pick up.

Advantage Energy ( AAVVF ) became the latest producer to announce

temporary curtailments on Tuesday. The Calgary-based company

began shutting in up to 130 million cubic feet a day of dry gas

last month.

Advantage CEO Michael Belenkie said he was disappointed some

producers were continuing to sell gas at a loss, instead of

curtailing production and allowing prices to recover until

demand from LNG Canada kicked in.

"Producers basically started to front-run the growth in

demand," Belenkie said. "In three, six, nine months we will see

substantial off-take from the system, but people have delivered

early."

The 14 million ton per annum (mtpa) LNG Canada facility, a joint

venture between five partners including Japan's Mitsubishi Corp ( MSBHF )

and Malaysia's state energy firm Petronas, will be

Canada's first major liquefied natural gas export terminal and

require around 2.1 billion cubic feet a day (bcf/d) of gas.

Even with that huge demand boost the AECO futures market

indicates prices will reach only C$2.46 a gigajoule

(C$2.33/mmBtu) in September 2025, around C$1.20/gj less than the

forward strip was suggesting a year earlier.

"Right now prices are not signaling there's going to be a

big windfall in 2025, the forward strip has come down

significantly," said Jean-Paul Lachance, CEO of Peyto

Exploration, Canada's fifth-largest gas company.

He said there was a growing consensus among producers that

LNG Canada likely will not fully ramp up until the second half

of 2025.

Peyto hedges 70% of its production to protect against market

volatility, and Lachance said he saw a risk companies could

restart curtailed volumes too quickly once prices improve.

"If everybody brings it all back on at once that will

probably stress the market again," he said, adding that many

Canadian producers sell into other North American markets to

reduce their exposure to volatile AECO prices.

LNG Canada said in a September update the facility is 95%

complete and remains on track to deliver first cargos by

mid-2025.

FRONT-RUNNING DEMAND

LNG Canada should reduce volatility in the AECO market,

which is prone to big price swings because of limited storage

capacity, said BMO Capital Markets analyst Jeremy McCrea.

"It's hard to see gas going to C$5 but it should provide

stability so we don't get down to the 50 cents level," McCrea

said.

In recent days AECO prices have rallied back above

C$1.50/gj, helped by production curtailments and a pickup in

Alberta oil sands demand.

A cold winter would also help draw gas out of storage and

lift prices, and RBN Energy analyst Martin King said curtailed

volumes could return to the market before the end of this year

if prices strengthen much further.

"If it's November 20 and prices are back up around C$2.25

all that gas that been temporarily shut in comes roaring back to

the market," King said. "Is it going to end up being too much of

a good thing and the market ends up short-circuiting itself?"