Canadian natural gas exports to the Lower 48 are down and likely to decline even more in the short term, and that poses "significant challenges" for the country's operators to remain competitive, a Nexen Inc. executive said Wednesday.
Nexen's David Slater, who manages marketing and structured products for the Calgary-based company, spoke about Canada's natural gas prospects both in the short- and long-term during a panel discussion at Intelligence Press Inc.'s GasMart 2009 in Chicago. He predicted that for the short-term, it will be challenging for Canada's gas producers and for pipeline operators.
"If you take a look at what Canadian gas exports to the Lower 48 have been doing, it's fallen off by 0.4 Bcf/d since summer 2008," Slater told the audience. "In that same period of time, field receipts have also declined by 0.4 Bcf/d...We're predicting we'll see further declines on the export side."
More competition from Lower 48 pipelines, especially the Rockies Express Pipeline, will pressure Canada's pipes, Slater predicted. One exception is the Alliance Pipeline system, which transports gas from northeastern BC and northwestern Alberta through Saskatchewan, North Dakota, Minnesota and Iowa to Illinois. The Alliance system is "fully contracted for another five years," Slater noted. "Alliance is a stable source of supply, and they don't expect to see any reductions in supply. Where the pressure comes from are for pipelines that have capacity expiring...
"Shippers are going to look at that to contract for supplies back to Alberta. What are the alternatives and how economic will it be? That will be the challenge in the near-term. It poses a significant challenge to some pipelines to remain competitive and compete with new pipeline entrants, i.e., Rockies Express. There's a lot of competition in the markets."
However, Canada, like the United States, is "awash with gas," Slater said. "It's a glass half full. Yes, we do have declines, but the reality is...the Alberta basin will be a material basin for decades to come and a significant source of supply...Some dynamics are changing, such as how pipelines are competing...What's been reduced in Canada has primarily been picked up by the Rockies region. There's no shortage of natural gas for the markets."
In a few years, Canada's gas shale production should be booming, said the Nexen executive. Once unconventional gas supplies are overflowing, Slater said Canada's excess gas could be liquefied and transported to Asian markets, bypassing the Lower 48 altogether.
Late last year Calgary-based Kitimat LNG Inc. asked potential users and investors whether they would be interested in a plan to export liquefied natural gas (LNG) from its proposed Bish Cove, BC, facility (see Daily GPI, Dec. 1, 2008). Kitimat originally had planned an import terminal, but last September officials cited shifting global gas supply and demand fundamentals and instead proposed an export terminal (see Daily GPI, Sept. 23, 2008).
With a steady supply of onshore gas in the United States and a likely stream of foreign LNG imports headed toward domestic shores, the Canadian export plan long-term could be a game changer for the country's gas industry, said Slater.
"Exporting gas out of Canada by Kitimat would transform the markets," he said. "This is an innovative project and not something we've really seen in North America at all. From a producer perspective, it raises a lot of questions. How do you price something like that?
"One of the attractions to a project like that is that most of the LNG contracts are indexed to oil to a basket of different prices. It's a very different pricing mechanism than the way domestic North American gas is priced. That's going to be an interesting proposition for producers when they are looking at the long-term price for production. We want to get the maximum for production, and this idea is something that we should observe and monitor and see if it gets traction or not."
If the Kitimat LNG export plan moves forward, "it has the potential to make a significant impact in North America," said Slater. "We would be moving from Nymex [New York Mercantile Exchange] pricing to having a component of production prices done completely off a different price platform."
Evidence points to immense quantities of unconventional gas in Canada, but the economy, Alberta's royalty regime tax structure and growing Lower 48 supplies have pressured Canada's gas drilling, the Nexen executive noted. Production from the Western Canadian Sedimentary Basin (WCSB), where Alberta has long held the title as the top production area, has been hit especially hard. In the first four months of the gas contract year that started last Nov. 1, Canadian exports dropped by 10.7% to 1.23 Tcf from 1.38 Tcf in the same period of 2007-2008 (see Daily GPI, May 22).
However, shale developments are looking better all the time. The WCSB's shale prospects have only begun to be tapped, and producers are encouraged by the drilling results from northeastern British Columbia (BC), where the Horn River Basin and the Montney trend are located.
"If you look at British Columbia, that is the bright spot right now for the basin (WCSB)," said Slater. "Production is holding, with some nominal growth occurring." By looking at prospects for the entire WCSB, officials are "certainly forecasting a supply reduction as a result of the current price environment we're in...We're on a treadmill and we're running every year to maintain production. We're sort of on one edge of a little valley of what's to occur in the basin.
"Shale, coalbed methane, tight gas...they will bring us out of that valley. The question is the timing and how quickly the gas can be brought on...Everything is moving toward shale. A very small component has been developed, and there is a huge potential in the unconventional areas."
Nexen last year estimated that its Horn River acreage contained 3-6 Tcf of recoverable contingent reserves (see Daily GPI, April 23, 2008). EOG Resources Inc., whose acreage is parallel to Nexen's, has estimated it has 6 Tcf of reserves in the play. And Apache Corp., which is partnering with EnCana Corp. on some acreage, reported that three horizontal wells drilled there last year test-flowed at rates of 8.8 MMcf/d, 6.1 MMcf/d and 5.3 MMcf/d.
"The Horn River is one of the top three shale plays in North America," Slater told the audience. "When you look at the geographic makeup, it's a very attractive formation to drill in. We've had a number of new entrants, and a lot of parallel to what's happening in the Lower 48. The same parties that are involved in the Horn River are very involved in shales in the U.S."
About 600 MMcf/d is being piped from the Horn River area now, but more infrastructure should build supplies from the area within a few years, said Slater.
"The proof is in the pudding of what's happening downstream," he said. "People are stepping up for commitments."
In February TransCanada Corp. completed a binding open season for capacity to carry 378 MMcf/d of shale gas from the Horn River Basin (see Daily GPI, Feb. 27). And Canada's National Energy Board in February transferred federal jurisdiction to TransCanada's NOVA grid in Alberta, which enables the pipeline operator to build extensions across Alberta's boundary into BC (see Daily GPI, March 31).
Nexen and six other producers in March committed to 760 MMcf/d of gathering and processing capacity on an expansion of Spectra Energy Corp.'s facilities in Fort Nelson, BC (see Daily GPI, March 13). That expansion could accommodate up to 830 MMcf/d of incremental gas from the basin.
"Pipelines have signed commitments that will come into service over a four- to five-year time horizon," said Slater. "I truly believe these pipelines will get developed. The capital dollars are being spent. It's really a question of timing."
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