Canadian natural gas production will continue to drop over the next three years even if prices recover and stabilize, potentially cutting exports to the United States by almost two-thirds, the National Energy Board (NEB) predicts.
The NEB’s latest annual deliverability forecast projects a 13% drop in production capacity to 13 Bcf/d by 2012 from 15 Bcf/d in 2009. Canadian demand, driven upward largely by steadily expanding Alberta thermal oilsands projects, is expected to grow by 10% to 9.5 Bcf/d in 2012 from 8.6 Bcf/d in 2009. Volumes left available for exports to the United States as of 2012 shrink to 3.5 Bcf/d — a steep drop of 5.5 Bcf/d or 61% from the 9 Bcf/d average during the 2008-2009 gas trading contract year that ended Oct. 31.
All those supply contractions are forecast by the NEB’s most likely mid-price scenario, in which the continental market’s Henry Hub trading benchmark recovers to annual averages of US$5.50/MMBtu this year, US$6 in 2011 and US$6.75 in 2012. The anticipated deterioration of Canadian productivity is blamed on natural depletion of aging conventional wells in the traditional supply mainstay of Alberta, after-effects of 2008-2009 drilling slumps and lag times in firing up unconventional shale gas development in northern British Columbia and Alberta.
Volumes of Canadian gas available for export to the U.S. shrink even in the NEB’s less likely high-price scenario, in which Henry Hub gas recovers to annual averages of US$6.50/MMBtu in 2010, US$7.00 in 2011 and US$7.75 in 2012. Such a pronounced rebound is expected to trigger a rapid drilling revival. But the NEB expects that total supply would still shrink to 14.3 Bcf/d as of 2012, cutting volumes available for pipeline exports by 47% to 4.8 Bcf/d.
A severe contraction is on the horizon for the Canada-U.S. gas trade if markets behave more like the NEB’s low-price scenario, in which the Henry Hub benchmark sticks at US$4.25/MMBtu this year, US$4.75 in 2011 and US$5.25 in 2012. Canadian production shrinks to 11.6 Bcf/d as of 2012, leaving only 2.6 Bcf/d for exports — a plunge of 6.4 Bcf/d, or 71% off the 2009 average deliveries to the U.S. of 9 Bcf/d.
After consulting numerous industry experts, the NEB reports an emerging consensus forecast of “a balanced gas market by the second half of 2010. Prices should generally remain within a range of US$5.00-6.00/MMBtu over this period as significant movements outside this range are resisted by two factors,” the board says.
“Should prices move much below US$5.00, demand for gas to generate power would increase and cause prices to move back up into the range. This situation occurred for a period of time in 2009 when natural gas began to displace some coal in baseload generation. If prices break above US$6.00/MMBtu, then more liquefied natural gas imports would likely be attracted to North America to boost supply sufficiently to cause prices to move back down into the range (of US$5.00-6.00/MMBtu).”
Market movements over the past couple of weeks have left some financial analysts wondering when such hopes for stability will come true, however. Rival Canadian investment houses Peters & Co. and FirstEnergy Capital Corp., for instance, are both wary. Peters analysts suspect the price rebound will take until the fall to firm up on rising demand fueled by an economic recovery. FirstEnergy says both “supportive weather” and reduced drilling rig activity will be needed to change the bearish tone of the gas market.
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