U.S. shale gas supplies and pipeline exports have been drafted into playing backup for Canadian energy merchants' plans to expand into overseas markets.
The supporting role for development in the United States surfaced in the latest and biggest proposal for a liquefied natural gas (LNG) plant and tanker terminal on the northern Pacific Coast of British Columbia (BC) at Kitimat.
Former National Energy Board (NEB) chairman Roland Priddle scripted the part for U.S. gas in his career as a consultant and expert witness in regulatory proceedings. On retainer for the LNG Canada Development Inc. partnership of Shell Canada, Mitsubishi Corp., Kogas Canada LNG Ltd. and PetroChina Investment (Hong Kong) Ltd., Priddle faces a tall order under the regulatory regime that he crafted as NEB chairman in the 1980s and '90s.
To approve foreign sales licenses the board is still required, by its 53-year-old founding legislation, to "satisfy itself that the quantity...to be exported does not exceed the surplus remaining after due allowance has been made for the reasonably foreseeable requirements for use in Canada having regard to the trends in the discovery of oil or gas in Canada."
LNG Canada seeks a 25-year export license for 32.95 Tcf of gas (see NGI, Aug. 6). The volume equals 48% of the combined current reserves of the nation's main producing provinces: 33.1 Tcf in BC and 35.7 Tcf in Alberta. While both provinces claim enormous potential for growth of shale gas supplies, development remains difficult to forecast in currently depressed market conditions. But the Canadian supply protection section in the NEB act also gives the agency a wide mandate to consider all aspects of markets by directing that the NEB "shall have regard to all considerations that appear to it to be relevant."
Priddle and another expert witness retained by LNG Canada, Ziff Energy Group, urge the board to think on a North American scale and take gas trading relationships with the United States into account rather than focus exclusively on Canadian conditions. In a written submission for LNG Canada, Priddle said the Asian export program should be "viewed from the standpoints of favorable historical experience, established policy, regulatory practice and intentions, market structure, demonstrated market functionality, supply adequacy and radically changed expectations for U.S. demand for Canadian gas."
Not only are pipeline exports into the United States shrinking due to the abundance of Lower 48 shale gas. Projections of adequate domestic supplies include the availability of sharply increased U.S. exports into Canada on a fully integrated "continental market" where neither country interferes with the gas trade's volumes or prices.
Priddle wrote that "it is no longer appropriate to think in terms only of the Canadian gas producing sector's ability to satisfy Canadian needs." He pointed to a Ziff report on the nation's supply-demand balance, also filed on behalf of LNG Canada, which highlights the emergence of a more balanced two-way gas trade across the border.
Ziff observed, "Low-cost sources of supply are growing, mainly from unconventional gas plays, some of which are located near major market centers." Results are already evident in reduced flows on TransCanada Corp.'s Mainline from Alberta to Ontario, as well as projects to increase northbound deliveries from the U.S., which are currently under construction or advancing through the regulatory process.
"Imports of gas from U.S. hubs into eastern Canada through Dawn [the major storage and trading center in southern Ontario] are displacing gas delivered previously via the TransCanada Mainline system from Western Canada. This trend is expected to continue," Ziff said. "Gas buyers will continue to be [incentivized] to minimize delivered gas costs in a functioning North American natural gas market."
U.S. gas deliveries into Ontario alone are headed up into the range of 3 Bcf/d, giving U.S. exporters a 90% share of a Canadian provincial market that is likely to stay flat at about 3.3 Bcf/d, Ziff Energy said. LNG Canada's expert witnesses predict that the jumbo BC tanker terminal's proposed maximum Asian exports of 3.4 Bcf/d will average less than 3.5% of the total North American gas market by the time that staged construction of the plant reaches its planned full size of four equal production trains in the 2020s.
Priddle and Ziff expect combined U.S. and Canadian gas use to rise gradually to about 94 Bcf/d as of 2020, then to keep on growing at only a gentle pace to 106 Bcf/d over the following 25 years. Effects of LNG exports on prices are likewise forecast to be mild. The Canadian experts predict that the resulting modest tightening of the North American supply-demand balance will only cause an average increase of 9 cents/Mcf in the continental market's benchmark Henry Hub trading -- or only a 1.4% increase from its average US$6.24 since 2007.
There is no reason to suspect that the continental gas market will develop counterparts to environmental and political headaches that threaten to obstruct growth of the Canada-U.S. oil trade by stalling construction of pipelines from the northern Alberta bitumen belt, Priddle said.
"The market model [of open, unrestricted gas trade] has been successful for more than 25 years in economic and social terms. It is acceptable to the major political parties in Canada and the U.S. It can reasonably be regarded as the enduring 'default setting' where policy and regulation will remain," predicted the former NEB chairman.
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