As Canadian natural gas exports to the United States turn up again, reversing shrinkage experienced in the last contract year, supply questions are moving out of the realm of theory and into practical cases.

The “bubble” of Canadian surpluses, a fixture of the international market throughout the 1980s and `90s, has burst to the point where a fight has broken out over who will run short of it in a foreseeable future of demand increasingly exceeding supply.

To the extent that scarcity takes over as the new reality, the shortages will occur at the far ends of the pipelines in central Canada and the United States, the National Energy Board has been told by a project proposed to increase gas consumption in British Columbia. The prediction comes from Georgia Strait Crossing Pipeline Ltd., a partnership of BC Hydro and Williams Cos. that wants to build a new gas connection to Vancouver Island.

The partners were prodded into studying the consequences of tightening supplies by an opponent in a hotly-contested NEB review of the project, the GSX Concerned Citizens Coalition. Armed with a skeptical report by an expert hired from the senior ranks of Canadian energy establishment, the coalition maintains that there will not be enough gas to keep the new sea-floor pipeline full for its lifetime.

The new line could only stay full by taking gas away from other markets for production from the Western Canada Sedimentary Basin, said the expert witness: GasEnergy Strategies Inc., the firm of Rob Woronuk, a veteran of decades in the Calgary gas community and a senior analyst on the Canadian Gas Potential Committee led by former NEB chairman Roland Priddle.

GasEnergy says “the natural gas world has changed dramatically.” Although new forecasts vary in detail, neither ends of the spectrum “provide even close to the amount of gas supply required to maintain current levels of production through 2025 — never mind 2033, the 30-year duration of the (GSX) pipeline.” The critics’ calculations suggest that, after deducting amounts consumed inside the western provinces, the amount of WCSB production available to the rest of Canada and the U.S. will be 13.3-14.5 Bcf/d.

Most forecasters, including the NEB, believe the productive capacity has either peaked or soon will, and that decline is about to start, if it has not already begun, unless the Canadian industry turns to deeper, more remote and costlier drilling targets on a large scale. By 2011, not even an additional one to 1.5 Bcf/d, which is forecast to come from a new Mackenzie Valley pipeline, is expected to be enough both to offset erosion of established gas fields and satisfy all the growing demand for western Canadian gas.

Within the WCSB, oilsands development alone is projected to generate steep increases in consumption in Alberta — and possibly enough to absorb all the new Arctic supplies — due to high demands for heat and power from gas-fired cogeneration plants as cornerstones of mining and synthetic-oil manufacturing complexes.

Canadian analysts agree with at least the direction of the trends projected by the latest long-range outlook report from the U.S. Energy Information Administration: Demand for imports in the U.S. is expected to rise by about 50% over the next 20 years. GSX maintains that a self-correcting mechanism built into energy free trade will keep Vancouver Island near the front of the line for western Canadian gas — “netback” prices received by producers after transportation costs.

In 2002, GSX calculates B.C. producers netted C$3.65-$3.96 (US$2.40-US$2.60) per gigajoule on gas sold at the Huntingdon-Sumas trading hub on the border with Washington State for use in the province or the U.S. Pacific Northwest. By contrast, B.C. producers netted C$2.98 (US$1.95) or as much as 25% less if they sold their gas at the Dawn trading hub in southwestern Ontario for use in eastern Canadian or U.S. markets.

GSX does not dismiss the idea that a time of comparative scarcity is coming. The pipeline partnership maintains that its critics’ prediction of supply shortages relatively close to wells in gas-producing B.C. “is counter to the economic allocation of gas supply,” a cornerstone of energy free trade. GSX predicts “gas producers will sell to markets that yield the best netback prices . . . which is the essence of allocative efficiency sought through reliance on competitive markets.”

GSX maintains that the proposed Vancouver Island pipeline would run short of gas only if there were a return to the bad old days of regulation prior to the mid-1980s — including forced selling to distant customers granted supplies by a seniority system.

GSX told the NEB “there can be no restriction that favors filling pipelines serving other markets over meeting the demand for gas in B.C. markets, especially when the gas is produced in B.C. The effect of such a restriction is to deny the operation of competitive markets, deny producers increased access to markets that yield higher netbacks, deny B.C. markets access to indigenous gas supply . . . and to impose a high level of federal regulatory intervention.” Any such prospect “is contrary to the board’s explicit policy to rely on competitive markets for gas supply and transportation.” —Gordon Jaremko

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