Canada's natural gas supplies may not be as necessary to the Lower 48 states as they were pre-shale discoveries. But the country's gas reserves won't lay buried for long, said Nexen Marketing's David Slater, managing director of Eastern Origination.

Slater shared a panel last week at GasMart 2010 in Chicago, and he shared his thoughts about Canada's growing gas reserves -- and where they may be headed in the future.

"There are a lot of complexities going on in the market right now in Canada," Slater said. "There are so many different factors depending on what transpires in the next five years."

Alberta, long the focus for Canada's gas producers, has seen its production down significantly in recent years. Producers began to move west to British Columbia, where they uncovered huge deposits of gas shale and a friendly royalty regime in the province.

However, Alberta's leaders took notice and have been working to entice gas producers to stay.

"Look at the rig count," Slater said, noting that Alberta's portion of the Western Canadian Sedimentary Basin (WCSB) is seeing more drilling today. "It's recovering from 2009 lows, and it certainly seems to have turned the corner from all-time lows in the basin...The rig count is back up to a 'normal' range, and we are seeing the results of that, with new production online."

And the WCSB, which extends into British Columbia, now has "two tales to tell," said Slater. The basin, once a prolific producer of conventional gas, has become a go-to destination for unconventional gas players looking for shale and coalbed methane deposits.

"There's been significant growth in the shale plays, and significant growth is expected in those basins," he said, referring to BC's Horn River and Montney shale formations. "Assuming perfect information, the choice to produce in every producing area, the front-end would get capital allocated first." Some Canadian shale plays "are very economic even when compared to Lower 48 shale plays."

Another destination for Canada's gas is its homegrown oilsands, which are being rapidly developed.

"We are seeing step changes in consumption right in the basins," Slater said. "Oilsands uses a significant amount of natural gas, and that accounted for 90% of the growth in consumption in Alberta for the last couple of years. More oilsands projects are on the books...As long as there is a healthy oil price, expect to see more projects occur and more demand on natural gas resources, which means less export capacity."

Slater said it also was "important to note" what Canadian gas pipelines have been heavily impacted by export capacity contracts rolling off.

"In terms of where and what pipelines and what areas of the country are seeing declines, they are mainly on TransCanada" exports, he said. "If you think about that pipeline, what markets that pipeline serves, it's primarily eastern Canada, the Midwest and the Northeast. That's where most of the declines [in production] were felt.

"This is problematic, clearly to TransCanada and the changing dynamics for all the traditional markets traditionally served by TransCanada...The current toll capacity is a very basic cost of service model: as capacity goes down, tolls go up."

Because of that, "toll escalation and toll uncertainty is contributing to lower exports" to the United States.

It's also more difficult for traditional markets served by the Alberta basin, because there's "more intense pipeline competition for those markets and basin-to-basin competition, particularly for the Marcellus [shale], which is right at the end of the pipeline and is able to serve all the markets that TransCanada served in the past."

On the "other side of basin...North American shale gas, there's a 'smiley face' in the basin right now," he said. "In the Horn River a number of producers are heavily involved, Nexen is one. There's 30 Tcf estimated, and a lot of drilling has occurred to date. The parties are getting a good handle on the technical aspects of the resources and what it will take to develop the resource."

The Horn River Shale's current output is estimated at 800 MMcf/d, said Slater. "By 2013 conservative estimates put it much higher. Infrastructure for 1.3 Bcf/d is being built, and that means there's near-term upside in the basin."

The Montney also has "very large potential in terms of ranges producers are looking at. It's marketable from the 7-63 Tcf range, which is just massive. The low end is a large resource base. On the high end, it's unbelievable. Where it will actually fall has yet to be determined because it's subject to so many variables."

Montney volumes will be "coming online soon this year," and volumes are expected to reach "above 1 Bcf/d within three to four years..."

For the short-term, the new Horn River and Montney gas could serve "traditional markets...in those areas to the south and east, then south and to the West Coast system to California, or work their way east...

But producers also are eyeing Asia for liquefied natural gas (LNG) exports, said Slater. Kitimat LNG Inc's proposed LNG export facility in Kitimat, BC, is controlled by Apache Corp.'s Canadian subsidiary (see NGI, Jan. 18). Apache bought a 51% stake in the terminal and a 25.5% interest in Pacific Trail Pipelines LLC (PTP) from Galveston LNG Inc., the parent company of Kitimat LNG. PTP is developing the C$1.2 billion Kitimat to Summit Lake Pipeline Looping Project to transport gas to the LNG export terminal (see NGI, April 13, 2009).

"This is the link to Asia," said Slater. "The changing variables potential create a lot of complexity in the basin going forward. Kitimat originally was designed to import LNG to North America. However, with the changing dynamics in the world market and the potential of resource plays in BC, it was transformed into an export liquefaction terminal, and it's attracted the attention of a lot of Asian buyers."

Asia "is one of the places identified with a demand curve. If we had the demand curve for Asian natural gas or for energy in general, we could see that it's growing tremendously. That's where energy demand is right now, Asian markets. They are looking for sources of energy, particularly in stable countries they can rely on."

The Asian influx appears to be the real deal. To date Sinopec has purchased ConocoPhillips' interest in Syncrude heavy oil and other oilsands projects. PetroChina purchased an interest in Athabasca oilsands. "Kitimat is going to get developed in some way, shape or form, and it could become a material export port."

There is a home for Canada's growing gas reserves, Slater asserted. "The wildcard is Kitimat. If Kitimat goes, it has the potential to siphon off 700 MMcf/d to 1 Bcf/d of production. The timeline around Kitimat is in the middle of the prospective decade. It has the potential to change things."

But in the short term, Canadian gas will continue to see "pipeline-on-pipeline competition and intense basin-to-basin competition. That's what Canadian supply is faced with. And that's a generally true statement across North America. Things are changing rapidly. Pay attention," Slater told the GasMart audience.

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