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When Shales Boom, Consumers Win

North American shale gas, particularly in the United States, has proven an energy cost-saving miracle for consumers who otherwise would be staring at prices three or four times higher, according to Toronto-based TD Group, the holding company for TD Bank.

"Lower [natural gas] prices have cut costs for businesses and consumers, and dramatically shifted the economics of power generation," said TD senior economist James Marple, author of the U.S.-focused report, "The Shale Shift." A second report, "What Does the Shale Gas Revolution Mean for Canada?" by economist Leslie Preston was also released.

While the same consumer benefits are being felt in Canada, its status as the world's third-largest producer of natural gas with the United States being its major customer for its supplies, gives shale gas both a positive and negative impact north of the U.S.-Canada border. Even with the unabashed good news surrounding shale supplies in North America, TD analysts said there are two uncertainties lurking: how robust future recovery rates will be and the regulatory environment. For now, however, the TD analyses confirm the boom is on.

"While shale gas wells are expensive to drill relative to conventional gas wells, the full-cycle cost of the wells in 2011 was 40-50% less than conventional wells," said Marple. "The initial capital outlays are higher, but the production from one well is also far higher." Without the advent of shale bursting on the North American energy scene in the past five years, "the price of natural gas would likely be in the neighborhood of $10-12/MMBtu, versus the approximately $3.50/MMBtu level it is today," Marple said.

The reduction in the absolute level of U.S. natural gas prices in recent months, much of which can be attributed to the shale and unconventional gas boom, has no doubt reduced the absolute amount end-users would have otherwise spent on supply. However, it is interesting to note that since 2007, the relative prices that U.S. end-users have paid versus the prevailing domestic wellhead price have actually increased versus the 2000-2006 time period, according to Energy Information Administration data and NGI calculations.

The markup that residential customers paid to the wellhead price averaged 214% between 2000-2006, but it increased to 250% between 2007-2011. Similarly, the markup rose from 186% to 209% for commercial customers; 124% to 128% for industrial customers; and 116% to 122% for electric power generators over those time periods. For now the benefits are "likely to be material" in regions and industries with the higher uses of natural gas, the report said, noting that both the chemical and power generation sectors are demonstrating this.

Marple said that shale gas "has changed the game for power generation," noting that 82% of the new electric generating capacity added in the past 10 to 12 years has been gas-fired plants. This has resulted in the first-ever occurrence earlier this year in which gas and coal represented the same proportion of power generation at 32% each last April (see NGI, July 2). Domestically there is also a "rebirth" in U.S. manufacturing and a continuing push for more use of natural gas in transportation, Marple said.

Both reports, however, see gas exports as inevitable for both Canada and the United States. "Expansion of the oilsands is expected to be a major driver of gas demand going forward. With Canada's traditional [U.S.] export market now able to meet far more of its a own natural gas needs, Canada needs to find new customers at home and abroad to extract the greatest value for our gas resources."

The report said that even though the United States imported more gas than it exported, its exports totaled 7% of its domestic gas production, most of it going via pipelines to Canada and Mexico. The government projects the nation will be a net exporter of gas during the next 10 years. "Recent cost-benefit analysis shows that allowing exports would have significant benefits to the United States," said Marple, who cited "A Strategy for U.S. Natural Gas Exports," part of the June Hamilton Project. "Benefits include a gain of approximately $4 billion annually from overseas sales and increased natural gas production generating new jobs."

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