Canadian natural gas producers face rocky future without West Coast LNG

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Mark Pinney, Canadian Association of Petroleum Producers, says petrochemicals and power generation are two sources of growing demand. Photo: CAPP.

CAPP expects Canadian natural gas exports to US to decline 50% by 2030

In the wake of Petronas’ decision to cancel the Pacific NorthWest LNG project three weeks ago, there is good and bad news for Canadian  natural gas producers over the short to medium-term. Unfortunately, the bad outweighs the good.

The Malaysian energy giant decided to pull the plug on LNG, but is staying in the Montney gas game with its subsidiary, Progress Energy, which has huge reserves in northeast BC. A 2013 study by energy regulators found that the Montney contains 449 trillion cubic feet of marketable natural gas, 14,521 million barrels of marketable natural gas liquids, making it one of the largest gas resources in the world.

“On the good news side, the Montney/Duvernay has both estimated reserves and cost of production that rivals even the best US plays,” says Blake Shaffer, an economics PhD. candidate at the University of Calgary.

“We are seeing deeper and longer wells with heavier fracks deliver greater production per well at lower cost. The technological learnings from the US are being transferred and applied here. On a cost of production basis, the Montney is as competitive as anything out there.”

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Unfortunately, being competitive isn’t enough in today’s North American gas market. BC natural gas is far from the big markets in Eastern Canada and that distance adds far more transportation costs than are borne by American shale producers in the northeast.

“The bad news side is that it takes cost of production plus cost of transport to get to market, and it’s the latter where BC and Alberta gas has a disadvantage. Shipping on TransCanada to get the product to eastern markets often costs as much as the price of the commodity itself (and this month, many times more),” says Shaffer.

“US shale gas is advantaged in their proximity to market demand and potential for increased LNG and Mexican exports.”

Shaffer point out that TransCanada Pipelines’ recent deal to significantly lower tolls from Western Canada to the East in exchange for long-term commitments is one of the few bright spots in the transportation story.

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Blake Shaffer. Photo: CD Howe Institute.

Maria Sanchez, manager of energy analysis for Drillinginfo, told me in an interview last year she was forecasting a 75 per cent decline in Canadian gas exports to the US over the next five years for exactly the reasons laid out by Shaffer.

That forecast has been lowered to 15 to 20 per cent because Canadian producers and pipeline operators are willing to reduce their costs in order to compete with the Americans.

“Natural gas imports from Canada (to the US) are expected to remain relatively flat at 5 Bcf/d starting in 2018. Last year, the US imported 6.1 Bcf/d. This year, averages 5.8 Bcf/d,” she said in an email.

“There are still some declines expected, but not as dramatic. The main reason for this is that the Canada gas has basically nowhere else to go, so they continue to price themselves lower in order to compete with US gas.”

The Canadian Association of Petroleum Producers represents those companies struggling to remain competitive and its forecast is even more bleak than Drillinginfo’s: that natural gas exports to the United States will decline to about half their current levels by 2030.

“This decline, however, could be tempered as the US increases its exports of liquefied natural gas to global markets, as well as its pipeline exports to Mexico, which could create an opportunity for Canadian gas to backfill market demand in North America in the event US supply growth is not as robust as currently anticipated,” said Mark Pinney, CAPP manager of natural gas markets and transportation.

Pinney notes there are several potential bright spots for Canadian gas producers, including the expansion of the Alberta oil sands from 2.7 million b/d to 4 million b/d by 2030. Most of that growth will come in the SAGD (steam assisted gravity drainage) fields, where natural gas is used to generate steam to heat bitumen and make it flow.

Natural gas The unknown variable in this scenario is the extent to which oil sands producers will be replacing natural gas with solvent as they lower greenhouse gas emissions in response to new Alberta government regulations.

“Although changes in production techniques in the oil sands may reduce the use rate of natural gas demand per barrel of production, there may still be overall growth in this sector as oil sands production,” said Pinney.

Another bright spot may be the phase out of Canadian coal-fired power generation in Canada, some of which will be replaced by natural gas-fired generation.

“This would represent an incremental market opportunity of 1.5 billion cubic feet per day,” according to Pinney.

“Although some of this generation capacity is slated to be met by renewables such as wind and solar, because these are intermittent sources of power they need to be backstopped by other sources of generation and natural gas provides a reliable source of supply to backstop the market.”

The petrochemical industry, which uses natural gas as a feedstock and has already committed to building two plants in Alberta, appears set for further expansion, especially if as anticipated the Alberta government introduces new incentives to attract investment in the sector.

“Global methanol consumption has been rising, particularly due to increases in Chinese demand, and Western Canada is blessed with abundant methane supplies, a feedstock for methanol, and would be an attractive location for an end user looking to diversify its sources of methanol supply,” said Pinney.

The future certainly isn’t rosy for Montney and Canadian natural gas producers, but if the industry continues to drive down costs and remain competitive, and government continues with its policy of shutting down coal plants and of promoting the petrochemical industry, producers may at least maintain the status quo.

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