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Canadian Exports to U.S. to Drop Dramatically, Says NEB

Canadian production will continue shrinking over the next three years while the use of natural gas in oilsands production grows, resulting in a dramatic drop in exports to the United States to as little as 2.8 Bcf/d, according to a new forecast by the National Energy Board (NEB).

The NEB foresees Canadian deliverability dropping from the 2010 average of 14.2 Bcf/d to a range of 11.7-13.7 Bcf/d by 2013. Last year's performance was already down by 19% from the 2007 peak of 17.5 Bcf/d.

Erosion of Canadian supplies available for export to the United States is liable to be faster than the shrinkage in productivity. In the NEB's view of the most likely future, a "mid-range" case, net exports of Canadian-produced gas are headed down to about 2.8 Bcf/d as of 2013, a drop of about 70% from their former range of 9-10 Bcf/d.

Fledgling Canadian shale gas development is expected to remain confined to the industry's initial discoveries of the richest deposits in northern British Columbia, and to remain too slow to make up for declines in traditional mainstay Alberta's aging conventional production. Part of the decline is occurring as producers switch to oil targets to collect premium prices.

At the same time as output retreats, domestic demand is continuing to grow as a result of steady expansion by Alberta thermal oilsands extraction projects, which are heavy industrial consumers of gas. Over the next three years the NEB expects oilsands gas use to grow by 600 MMcf/d.

(Net exports are U.S. sales after re-imports into central Canada of gas that follows a circuitous route from the western provinces into the U.S. Midwest then back north via a variety of trading hubs and pipeline connections. The figure also excludes exports into the northeastern U.S. from Canada's lone liquefied natural gas import terminal in New Brunswick.)

After canvassing producers, pipelines, analysts and consultants, the NEB sees three futures as realistic possibilities for Canadian gas supplies over the next three years.

In a "low" case, annual average benchmark Alberta prices drop by 19% this year from the 2010 average of C$3.57/gigajoule (GJ) (US$3.75/MMBtu) to C$3.01/GJ (US$3.16/MMBtu) in 2011, then only recover partially to C$3.23/GJ (US$3.39/MMBtu) in 2012 and C$3.41/GJ (US$3.58/MMBtu) in 2013. Deliverability shrinks from the 2010 average of 14.2 Bcf/d to 13.1 Bcf/d this year, 12.4 Bcf/d in 2012 and 11.7 Bcf/d in 2013.

(For international price comparisons, the Canadian and U.S. dollars are at par but an MMBtu is 5% more than a GJ.)

In the mid-range case, Alberta prices gradually climb to C$3.70/GJ (US$3.88/MMBtu) this year, C$3.92/GJ (US4.12/MMBtu) in 2012 and C$4.35/GJ (US$4.57/MMBtu) in 2013. Production capacity contracts to 13.4 Bcf/d in 2011, 13.2 Bcf/d in 2012 and 12.8 Bcf/d in 2013.

In the NEB's "high" case, Alberta prices recover to C$4.72/GJ (US$4.96/MMBtu) this year, C$4.94/GJ (US$5.19/MMBtu) in 2012 and $5.37/GJ (US$5.64/MMBtu) in 2013. Production capacity holds steady at reduced levels of 13.7 Bcf/d in 2011, 13.8 Bcf/d in 2012 and 13.7 Bcf/d in 2013.

Even the most optimistic scenario spells lean times by comparison with most of the the first decade in this century, when North American demand grew while production stayed flat or shrank before the onset of shale production and the global economic contraction. "Canadian natural gas prices generally increased from 2003 to 2008, averaging almost C$7.00/GJ (US$7/37/MMBtu). Since that time, prices have averaged closer to C$4.00/GJ (US$4.20/MMBtu)," the NEB said.

The result in Canada has been a drop in gas drilling and an accelerating switch in targets to oil or liquids-rich gas deposits, and the NEB sees no signs of current trends changing.

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