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Analyst Sees Canadian Imports Marginalized

Steadily increasing U.S. natural gas production will gradually catch up with stagnant consumption over the next few years, reaching 23.3 Tcf a year, just a whisker away from the projected 23.7 Tcf demand in 2014, according to a recent forecast.

"This is not good news for Canadian producers," said independent natural gas analyst Patrick Rau, who projected U.S. production, consumption and imports from 2009 through 2014. "If the U.S. is able to supply almost all of its needs internally, it will import less from Canada. Something has to give since there simply isn't enough U.S. storage to handle the excess."

The gain in U.S. production is expected to marginalize Canadian imports from approximately 3.6 Tcf (3 Tcf net of U.S. exports to Canada) in 2008 to 1.5 Tcf (1 Tcf net) in 2014.

U.S. production, bolstered by unconventional resources, increased an estimated 5.6% from 19.7 Tcf in 2007 to 20.8 Tcf in 2008. The rate of increase is expected to fall slightly in 2009 to 4.6% and to 3% growth in 2010, Rau said. After that the annual production increases will be about 1% for the next four years, resulting in 2014 production of 23.3 Tcf. He sees accelerated drilling occurring in 2010 to retain leases signed in 2008.

Shale gas, most notably the Marcellus and Haynesville shale plays, will be the big movers in the production growth, Rau predicts, unless there is a major backlash from the hydraulic fracturing/pressure pumping operations.

Rau, formerly with the Harris Nesbitt/BMO Capital Markets investment firm, factors the recession into 2009-2010 projections for gas consumption, which stay fairly steady at around 23 Tcf for the next two years, then gradually rise to 23.7 Tcf by 2014. In the early years industrial load lost to the recession will be picked up by electric generation demand, thus limiting the downturn.

What this adds up to is steadily decreasing Canadian imports, Rau said, "which may very well slow the development of the Horn River and Montney Shale plays in British Columbia. There are already infrastructure issues that will prevent the Horn River from generating any significant production until 2012, but a lack of a market won't help either.

"I still expect these plays to be developed, especially since production from these shales could offset more expensive conventional production (especially in Alberta with its higher royalties)." Growing Canadian oilsands production also will help absorb some of the excess, assuming oil prices return above $70/bbl, Rau said.

While he doesn't expect to see a flood of liquefied natural gas (LNG) imports, the volume is expected to increase slightly over the next few years as new import terminals, some with contracted LNG volumes, open up. U.S. LNG imports are expected to increase from 0.4 Tcf in 2008 to 1 Tcf by 2011 and then continue at that rate. At the same time Rau expects U.S. LNG receiving capacity will increase from 10.7 Bcf/d to 12.1 Bcf/d in 2009 and continue at that level through 2014.

Producers and LNG regas facility operators may decide to step up their efforts to export LNG, Rau said. A few already have started to make noises in that direction and "I really can't think of too many industries that generate acceptable returns on invested capital with just a 23% average load factor." Lower natgas prices and costs, pressured down by the U.S. and Canadian surplus, and lower unit costs from production increases could make even the netbacks from an LNG export operation attractive to some producers with stranded gas, Rau speculated.

Producers would have to partner with the LNG terminal operators to share the high cost and risk of building a liquefaction terminal, but "the existing regas facilities are the most likely places to put liquefaction facilities, because the same ships that import LNG would have to haul it away, and the infrastructure/zoning/shipping lanes are already in place for that."

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