Amid warnings that natural gas supplies are poised to tighten upin the United States, Canadian exporters are lining up to fill anygap. As Joe Foster, chairman of the U.S. National PetroleumCouncil, voiced concerns over the future of American supplies,ProGas Ltd. filed the first application to Canada’s National EnergyBoard for a long-term license for exports via Alliance PipelineProject as soon as it is completed in October of 2000.

At a conference held in Calgary by the Canadian Energy ResearchInstitute, Foster pointed out U.S. gas consumption of 21.34 Tcf andproduction of 18.93 Tcf were nearly 1.5% higher than expected in1998. But the average 1998 price of US$1.96/Mcf was 18% lower thanthe $2.40 the U.S. industry anticipated, causing sharpcontractions in investment, drilling and potentially in futuresupplies.

CERI was told that the council, an industry advisory agency forthe U.S. Secretary of Energy, plans an inquiry into the developingsqueeze. Among U.S. gas producers Foster’s figures anticipate cutsin capital spending by 16% among international integratedcompanies, 28% among U.S. domestic integrateds and 38% by majorU.S. exploration and production houses.

The view ahead from the Canadian perspective on the NorthAmerican gas market continues to be different-and brighter. Thanksto favorable currency exchange rates and new pipeline capacity thatstarted relieving bottlenecks, Canadian average prices stayed firmabove C$2/Mcf for the last two years and are projected to hang inagain or even improve through 1999. While Canadian producers arealso cutting budgets, they are doing even more to switch targets togas, and it now accounts for about 60% of their drilling. There isa net increase in gas drilling north of the border. As of March 14,Canadian producers successfully completed 1,112 gas wells so far in1999 compared to 981 as of the same date last year. Althoughanalysts such as CERI’s Paul Mortensen continue to emphasize thatCanadian gas drilling should eventually accelerate by as much as20% to 6,000 or more wells per year to fill all the new exportpipeline capacity, the ProGas filing underlined the immediateavailability of backed-up supplies that led to the C$4.5-billion(US$3-billion) Alliance route from northeastern British Columbia toChicago.

ProGas told the NEB that even though it now sells about 1.4Bcf/d for about 160 producers, it has already dedicated more thanenough gas reserves to the supply pool to fill its Alliancecapacity of 65 MMcf/d – and much more, right now. Theproducer-owned marketer said its current contracts arm it withsupplies of 1.52 Bcf/d – about 1 Bcf more than it sells, or acushion 15 times bigger than the Alliance commitment. Far fromcoming as a surprise, Foster’s warning highlighted sources ofoptimism on the Canadian side of the international gas market. Someof the best sources are on the U.S. side of the border. Among thegood-news literature circulating around Calgary is the latest”baseline projection” report by the Chicago-based Gas ResearchInstitute. GRI documents pressure on American supplies, andcorresponding growth in Canadian exports to the U.S.

Like Foster, GRI foresees annual U.S. gas consumption rising byas much as 40% into the 30 Tcf range in 2015. But the instituteadds that American exploration and production will get little helpfrom prices to keep up with growth in U.S.demand. GRI says that inthe U.S., “the prospects for increased real gas prices haveessentially disappeared,” because of the nature of the demand fornew supplies. More than 70% of the anticipated expansion inconsumption is projected to be in “price-sensitive” markets wheregas competes with other energy sources: industrial consumers,electric power generation and alternative-fuel vehicles. In GRI’sprojections, “By the year 2015, 60% of U.S. gas consumption is inthe price-sensitive markets.”

Canadian confidence in taking a healthy share of the U.S. growthmarkets rests on solid experience, also well documented by Americanliterature including quarterly reports on the trade by the U.S.Department of Energy’s Office of Fossil Energy as well as GRI’srecords. U.S. gas consumption rose more than 30% in 1985-95, thefirst 10 years of flat to falling prices brought on byderegulation, open-access pipelines and sales competition on bothsides of the international boundary. About 52% of American gasconsumption is already on price-sensitive markets, GRI estimates.In those same inaugural years of gas free trade, Canadian exportsnearly quadrupled, their share of the U.S. market surged to 13%from 5% and their value mushroomed to about US$6.1 billion from$1.8 billion. GRI sees the trends continuing, although at a moremoderate pace because the initial upheaval brought on byderegulation has ended. “High drilling costs and limits oninvestment are likely to constrain the growth in activity in theGulf of Mexico somewhat in the future. Limits on available cashflow in the lower-48 states are likely to result in some shift inthe share of (North American) production to Canada over time.”

The institute expects annual Canadian gas exports to climb about50% to peak at 4.5 Tcf. Then comes a dip as Canada increasinglyturns to higher-cost supplies and American producers start to catchup. But the dip is modest, with Canadian exports expected to bestill 4.3 Tcf in 2015. The Canadian share of U.S. gas markets isforecast to peak at 17.4% in 2005, then hold up well at 14.6% by2015.

In the GRI scenario, western Canada is headed for growth in gasproduction to the point where it “rivals the Gulf of Mexico.” After2000, the Chicago institute expects much of the growth in Canadianproduction and exports to come offshore of the East Coast.

Gordon Jaremko, Calgary

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