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Analysts: Canadian Gas Industry Must Look Beyond U.S.

Faced with pricing uncertainty, anticipated decrease in U.S. demand and a shifting regulatory landscape, Canadian gas companies will need to look beyond the United States if they are to retain market share and remain competitive, according to Ernst & Young.

The potential of Canada's portion of the Utica Shale, which runs from Canada into the Lower 48, is likely to add to the shifting dynamics of the nation's gas industry, said Lance Mortlock, senior manager in Ernst & Young's Canadian oil and gas practice.

"Here in Canada, many perceive that the Utica Shale formation northeast of Montreal will not only create huge economic growth in Quebec, but also change the flow of gas in Canada, meaning less demand for Western Canadian gas," Mortlock said. "With this anticipated shift on the horizon, Canadian companies should be on the lookout for new long-term customers in markets like Asia, where demand is rising. Canada's ability to export this gas is key to our growth."

Quebec has begun a two-year environmental assessment of the shale gas industry and plans to implement a new royalty regime once it concludes that effort (see related story; Shale Daily, March 21; March 14; March 10). The new royalty rate would vary from 5% to 35%, depending on the market price of natural gas and the productivity of an individual well. Similar progressive rate structures for natural gas have been implemented in British Columbia and Alberta.

Companies are likely to turn to joint ventures and partnerships to share risk and cost, according to Ernst & Young (see related story).

"Continued mergers and acquisitions activity is expected to be driven by juniors struggling to remain profitable and willing to consolidate, especially in cases in which companies are focused on gas and have limited oil interests. More value chain integration between midstream and downstream companies is also likely to help lower intermediary costs and provide market flexibility for price."

While Canada is currently the largest exporter of natural gas to the United States, shale gas reserves in the United States are forecast to continue to slow imports from Canada, the analysts said.

"While we expect lower demand from the U.S., Canada is seeing interest from companies that hold a long-term view of the unconventional natural gas sector, including international oil companies, national oil companies and independents -- many of them from Asia," Mortlock said.

Other challenges facing the Canadian unconventional gas industry include the timing of new pipeline facilities and infrastructure, uncertainty about the nation's power stations converting from coal to gas, questions about the industry's ability to solve environmental challenges and the effects of relatively low prices brought on my overcapacity and high inventories, according to Ernst & Young.

A recent report by the Petroleum Services Association of Canada (PSAC) indicated an accelerating trend in Western Canadian drilling to targeting oil rather than gas (see Shale Daily, Feb. 8). The trend is prompted by the persistently sharp contrast between expensive oil and cheap gas, PSAC said.

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