Canadian natural gas exports face ‘complete displacement’
Matthew Staver/Bloomberg News
Pipe is stacked for use in the construction of a section of the Rockies Express Natural Gas Pipeline in August of 2006. The new $6-billion pipeline going from Colorado to Ohio has been displacing western Canadian gas production for about a year now.
November 24, 2010 – 8:00 am
By Keith Schaefer
Western Canadian natural gas exports to Northern California could be completely displaced by abundant, low cost gas production and several new gas pipelines in the United States, says a new study by energy analysis firm Bentek.
Overall, Canadian gas exports to the United States will drop by 2 billion cubic feet per day over the next few years – almost 30% – and this impending loss of the Northern California market builds upon previous declines for western Canadian gas exports to the U.S. northeast.
Increased Canadian demand and declining Canadian supply will pick up some of the slack, but the report said it won’t be enough to offset a significant loss of exports to the U.S. market in the near term.
Bentek’s report, titled “The Big Squeeze,” outlines how fast-growing production from the Marcellus shale in Pennsylvania is displacing Canadian gas to the lucrative northeast U.S. market, and how new pipeline capacity carrying low cost gas out of the Rocky Mountains is now set to take over for much of Canadian gas to the U.S. midwest and lucrative California markets.
“What we outlined in our study was complete displacement of Canadian gas into Northern California by the summer of 2014,” said Jack Weixel, director of energy analysis at Bentek.
While the new $6-billion Rockies Express pipeline going from Colorado to Ohio has been displacing western Canadian gas production for about a year now, U.S. natural gas production from the Marcellus shale has been doing the same recently for Canadian gas to the U.S. northeast. Canadian suppliers have been able to send more natural gas into the midwest and western United States to help make up for that drop.
But Bentek says even that market is at risk and Canadians could see it curtailed within the next two weeks, in early December 2010. That’s when low-cost Rockies gas supply will start flowing east on the newly installed Bison Pipeline. This will give Rockies producers an additional 500 million cf per day of capacity out of the Powder River basin in Wyoming.
The Bison connects into the Northern Border Pipeline, which moves most western Canadian supply. Weixel expects the Bison Pipeline to create stiff competition for Canadian gas, which he says has to get cheaper to stay competitive.
“They [Canadian gas producers] need to drop 14 cents [per mcf]. Let’s say Rockies gas is $3.50/mcf – that means that AECO [the Canadian natural gas benchmark price out of Edmonton] needs to be priced $3.36 to be competitive in northern California,” Weixel says, adding that the break-even price for certain Rockies gas producers in the Pinedale and Jonah tight sands plays of Wyoming is well below $3 per mcf.
Weixel expects net Canadian exports to drop 2 bcf/d through 2015 – out of a total of 6.9 bcf/d now. But it’s not all gloomy for producers and their shareholders.
“At the same time as exports are declining, you’ve got Canadian demand growing, primarily from oilsands in the west and coal retirements in the east,” he says. “You’ve also got production slipping from conventional gas plays in Alberta. So there is a tightening supply-demand balance.”
“Traditionally that would lend itself to gas prices getting stronger. But we believe that due to the drop in exports, that there will be just as much gas on hand in Canada as there is now.”
Canadian gas production is actually going up because of the unconventional plays in British Columbia, such as the Montney. However, Weixel says the gas rig count in Alberta dropped off a cliff this September, and is about half the number it was last year and about one quarter what it was in 2008.
Keith Schaefer writes a financial newsletter on junior energy stocks, The Oil and Gas Investments Bulletin, www.oilandgas-investments.com
Read more: http://business.financialpost.com/2010/11/24/canadian-natural-gas-exports-face-complete-displacement/#ixzz16IsMnmyy
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