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U.S. Exports to Canada Closing in on 1 Tcf

Exports of U.S. gas into Canada are on track to top 1 Tcf this year, having increased six-fold from 158 Bcf in 2001, at the same time Canadian pipeline deliveries into the United States continue to slide.

U.S. natural gas exporters are within reach of setting their sixth consecutive annual record this year or at least matching the peak hit in 2011, according to trade accounts kept by the U.S. Department of Energy (DOE).

Pipeline deliveries north to Canada will top 1 Tcf in 2012 if U.S. suppliers continue the first quarter performance reported by the DOE's Office of Natural Gas Regulatory Activities. Jan. 1 to March 31 shipments of U.S. gas production to Canada were 264 Bcf. The Canadian sales were two-thirds of total U.S. first quarter 2012 exports of 402 Bcf, which also included 128 Bcf of deliveries to Mexico and 21 Bcf of liquefied natural gas (LNG) shipments.

Despite persistent economic weakness in major energy-consumer regions and a mild heating season, U.S. gas exports slipped by only a marginal 1% from first quarter 2011 sales of 407 Bcf, including 267 Bcf into Canada. Northbound U.S. pipeline deliveries across the border totalled 937 Bcf last year. The 2011 Canadian sales set a sizzling growth rate of 26% over the 2010 total of 742 Bcf and established a fifth straight annual record for U.S. exports.

The growth streak began in 2007, when U.S. deliveries into Canada grew by 41% to 482 Bcf. The traffic continued to increase by 22% to 590 Bcf in 2008 and by 19% to 700 Bcf in 2009.

At the same time annual Canadian pipeline deliveries south into the U.S. have dropped by 16% to 3.2 Tcf since they peaked at 3.8 Tcf in 2007. The Canadian gas export contraction over the past five years reversed a growth streak that lasted nearly 20 years after the mid-1980s onset of gas deregulation and energy free trade created an open, continental market.

From the perspective of the Alberta-based Canadian supply side of the market, the contraction continues. In first quarter 2012 Canadian pipeline deliveries into the U.S. fell by 13% to 785 Bcf compared to 905 Bcf during the same period of 2011.

Sharp drops in prices hit both sides of the Canada-U.S. gas trade. Canadian gas flowing into the U.S. fetched an average of C$2.72/MMBtu (U.S. dollar at par) at the border during the first quarter of this year, down 37% from C$4.29/MMBtu in the same period of 2011. U.S. gas headed north into Canada crossed the border for US$2.94/MMBtu, down 36% from US$4.55/MMBtu in first-quarter 2011.

Industry analysts north of the border attribute the turnabout in gas trade flows to natural depletion of aging Alberta wells, rising Canadian industrial consumption led by Alberta thermal oilsands extraction projects, and growing new U.S. shale production.

The consensus in the industry capital of Calgary is that the trend toward a more balanced Canada-U.S. gas trade pattern will continue, with Alberta continuing to fade as a supplier while Ontario and Quebec increasingly rely on imports of U.S. production. The U.S. trade records show that the majority of U.S. exports cross the border via pipeline connections beneath the St. Clair River between Michigan and Ontario. An additional link is developing farther east as TransCanada Corp.'s Mainline carries out a newly-approved project to reverse flows on links with the U.S. pipeline grid in the Niagara Falls region.

The new wrinkle expected to emerge in the international gas trade is Canadian LNG exports to Asia, with new pipelines and tanker terminals on the Pacific Coast tapping shale supplies developing in northern British Columbia, Alberta and potentially the southern Northwest Territories.

Canada's National Energy Board (NEB) observes that the new pattern, of abundant supply and trade flowing both ways, is smoothing former summer market spikes, when prices were driven sky-high by air conditioning demand for electricity from gas-fired power stations. In its current forecast for gas markets during July through September, the NEB expects monthly average Alberta prices to rise only moderately to an average of C$2.09/MMBtu from spring lows that bottomed out at a hardship level of C$1.86/MMBtu.

Gas storage sites and markets remain glutted on both sides of the Canada-U.S. border despite sharp reductions in drilling in both countries as a result of soft prices, the NEB said. "Altogether, it is expected that total U.S. Lower 48 and Canadian production will remain steady over the next few months despite the decline in drilling," NEB said.

"One factor encouraging production is the price of oil, which is currently much higher than natural gas prices on an energy-equivalent basis," the board said. "In some instances, companies drilling for oil and other liquids produce significant volumes of associated natural gas that is not influenced by the level of natural gas prices."

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