Canadians Eager to Fill Any Production Gap
Amid warnings that natural gas supplies are poised to tighten up
in the United States, Canadian exporters are lining up to fill any
gap. As Joe Foster, chairman of the U.S. National Petroleum
Council, voiced concerns over the future of American supplies,
ProGas Ltd. filed the first application to Canada's National Energy
Board for a long-term license for exports via Alliance Pipeline
Project as soon as it is completed in October of 2000.
At a conference held in Calgary by the Canadian Energy Research
Institute, Foster pointed out U.S. gas consumption of 21.34 Tcf and
production of 18.93 Tcf were nearly 1.5% higher than expected in
1998. But the average 1998 price of US$1.96/Mcf was 18% lower than
the $2.40 the U.S. industry anticipated, causing sharp
contractions in investment, drilling and potentially in future
CERI was told that the council, an industry advisory agency for
the U.S. Secretary of Energy, plans an inquiry into the developing
squeeze. Among U.S. gas producers Foster's figures anticipate cuts
in capital spending by 16% among international integrated
companies, 28% among U.S. domestic integrateds and 38% by major
U.S. exploration and production houses.
The view ahead from the Canadian perspective on the North
American gas market continues to be different-and brighter. Thanks
to favorable currency exchange rates and new pipeline capacity that
started relieving bottlenecks, Canadian average prices stayed firm
above C$2/Mcf for the last two years and are projected to hang in
again or even improve through 1999. While Canadian producers are
also cutting budgets, they are doing even more to switch targets to
gas, and it now accounts for about 60% of their drilling.
There is a net increase in gas drilling north of the border. As
of March 14, Canadian producers successfully completed 1,112 gas
wells so far in 1999 compared to 981 as of the same date last year.
Although analysts such as CERI's Paul Mortensen continue to
emphasize that Canadian gas drilling should eventually accelerate
by as much as 20% to 6,000 or more wells per year to fill all the
new export pipeline capacity, the ProGas filing underlined the
immediate availability of backed-up supplies that led to the
C$4.5-billion (US$3-billion) Alliance route from northeastern
British Columbia to Chicago.
ProGas told the NEB that even though it now sells about 1.4
Bcf/d for about 160 producers, they have already dedicated more
than enough gas reserves to the supply pool to fill its Alliance
capacity of 65 MMcf/d - and much more, right now. The
producer-owned marketer said its current contracts arm it with
supplies of 1.52 Bcf/d - about 1 Bcf more than it sells, or a
cushion 15 times bigger than the Alliance commitment.
Far from coming as a surprise, Foster's warning highlighted
sources of optimism on the Canadian side of the international gas
market. Some of the best sources are on the U.S. side of the
border. Among the good-news literature circulating around Calgary
is the latest "baseline projection" report by the Chicago-based Gas
Research Institute. GRI documents pressure on American supplies,
and corresponding growth in Canadian exports to the U.S.
Like Foster, GRI foresees annual U.S. gas consumption rising by
as much as 40% into the 30 Tcf range in 2015. But the institute
adds that American exploration and production will get little help
from prices to keep up with growth in U.S. demand. GRI says that
in the U.S., "the prospects for increased real gas prices have
essentially disappeared," because of the nature of the demand for
More than 70% of the anticipated expansion in consumption is
projected to be in "price-sensitive" markets where gas competes
with other energy sources: industrial consumers, electric power
generation and alternative-fuel vehicles. In GRI's projections, "By
the year 2015, 60% of U.S. gas consumption is in the
Canadian confidence in taking a healthy share of the U.S. growth
markets rests on solid experience as well as GRI records and U.S.
DOE reports. U.S. gas consumption rose more than 30% in 1985-95,
the first 10 years of flat to falling prices brought on by
deregulation and open-access pipelines. About 52% of American gas
consumption is already on price-sensitive markets, GRI estimates.
In those same inaugural years of gas free trade, Canadian exports
nearly 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 more
moderate pace because the initial upheaval brought on by
deregulation has ended. Limits on available cash flow in the
lower-48 states are likely to result in some shift in the share of
(North American) production to Canada over time."
The institute expects annual Canadian gas exports to climb about
50% to peak at 4.5 Tcf. Then comes a dip as Canada increasingly
turns to higher-cost supplies and American producers start to catch
up. But the dip is modest, with Canadian exports expected to be
still 4.3 Tcf in 2015. The Canadian share of U.S. gas markets is
forecast to peak at 17.4% in 2005, then hold up well at 14.6% by
In the GRI scenario, western Canada is headed for growth in gas
production to the point where it "rivals the Gulf of Mexico." After
2000, the Chicago institute expects growth in Canadian production
and exports to come offshore of the East Coast.