Pipelines and Canada’s Servitude to a Single Export Market (Part I) — CAPP, the Canadian Association of Petroleum Producers, is a reliable source of information on Canada’s oil & gas markets and points out that virtually all of Canada’s oil and natural gas exports have served, and continue to serve, just one customer … the United States.
Over the past decade, the shale/fracking revolution has disrupted “Peak Oil” theories, and facilitated rapid growth in both oil and natural gas production in the U.S. In 2017, the U.S. became a net exporter of natural gas and in 2018, also became a net exporter of oil and refined fuels for the first time in decades. These developments have resulted in the U.S. becoming not only Canada’s biggest customer but also Canada’s number one competitor! A decade ago, these developments seemed all but impossible, as U.S. executives and politicians were predicting declining conventional production and massive imports of oil and natural gas.
Because of limited pipeline capacity and export infrastructure, Canada is forced to sell its oil and gas into a saturated North American market, resulting in widening differentials to U.S. benchmark pricing. It is vital to diversify markets for Canada’s oil and natural gas production to ensure Canada receives full value for its natural resources.
Part 1 (Natural Gas and LNG)
Since topping out at over 10 Bcf/d (billion cubic feet per day) in 2007, Canadian gas exports to the U.S. have fallen steadily to 7.8 Bcf/d in 2018. However, imports from the U.S. grew significantly over the same period, primarily delivered from MidWest U.S. through the Vector Pipeline into Ontario. Natural gas imports from the U.S. to Canada reached a record-high level of 2.4 Bcf/d in 2011, and have remained above 2 Bcf/d since then. The net result over the past decade has been a drop in net Canadian exports of some 4.4 Bcf/d, or 1.6 Tcf per year!
Feeding off its production capacity increases from the fracking revolution, and recognizing a growing global demand for natural gas as a lower carbon alternative to coal and crude oil, the U.S. quickly began an aggressive LNG strategy, with the rapid construction of large scale LNG plants at Sabine Pass, LA and Cove Point, MD, which commenced shipping in 2016 and 2018 respectively!
Newer LNG plants at Corpus Christi, Cameron and Freeport on the Gulf of Mexico, are expected to result in U.S. LNG export capacity exceeding 10 Bcf/d (3.6 Tcf per year) by 2021. This would place the U.S. as the third largest LNG exporter in the world, behind only Australia and Qatar.
Source: U.S. Energy Information Administration
Alberta and British Columbia form the epicenter of Canadian oil and gas production, and is within reasonable distance to tidewater access on BC’s Pacific coast. The opportunity for Canadian participation in a growing global liquefied natural gas (LNG) market, resulted in a rash of LNG proposals predominately at sites along the coast of BC for shorter access to Far East markets. The early years of Canadian recognition of LNG potential extended from 2010 to 2014, as world-class LNG developers and potential Asian buyers were genuinely engaged in Canadian opportunities. This interest was evidenced by at least seven major LNG project proposals that had progressed through the relevant regulatory processes. Canadian Government agreement and support at both Federal and inter-Provincial levels for oil and gas pipelines was and is still an important requirement. However, prevarication and vote-hustling between the three political parties involved, proved a major impediment to seizing the opportunity. Government at all levels faced escalating environmental opposition and resistance from indigenous (First Nations) on concerns over land claims and territorial rights.
Not surprisingly in the face of years of interminable delay, of the 13 original LNG proposals put forward for BC, only one, LNG Canada, is currently active. The $40 billion LNG Canada project is a joint venture partnership between Shell, PETRONAS, PetroChina, Mitsubishi Corporation and KOGAS to build an export facility in Kitimat, northern British Columbia. There is not a single Canadian company in the partnership!
As part of this LNG development, Coastal GasLink, the company building a 670-kilometre natural gas pipeline to feed the LNG Canada project, has also faced opposition from First Nations and at the end of 2019, the pipeline right of way was blocked by protesters. In January 2020, Coastal GasLink resumed work activities including delivery of pipeline materials, and the LNG Canada project is not expected to start exports before 2024.
Over the 10-year period 2008-2018, AECO-C natural gas price dropped steadily from about C$8/gigajoule to less than C$2/gigajoule. The AECO price also continued its trend of delinking from the Henry Hub price in 2018. The price differential between AECO and Henry Hub widened to US$1.95/MMBtu in 2018 from US$1.16/MMBtu in 2017, much wider than the historical average of US$0.65/MMBtu between 2009 and 2015. The recent trends emphasize the delinking of Alberta’s gas market from the U.S. market, primarily due to U.S. gas accessing international markets through LNG exports, whereas Alberta’s gas is stranded with removal capacity filled.
At the time of this publication, the U.S. is producing so much natural gas, that forecasters are suggesting that prevailing low prices and weak forward strip pricing will force cutbacks in U.S. gas drilling activity through 2020 to drive a recovery in the commodity price. This is the market in which Canada is competing and will continue to be exploited until other export alternatives are created. Perhaps LNG Canada will help, but it may be “too little and too late”.
We are skeptical that the proposal by Alberta’s Associate Minister of Natural Gas, Dale Nally, to relieve his Province’s shallow gas producers’ economic plight through a 35% property tax reduction, addresses the fundamental problem of a “lower for longer” North American gas price scenario! Gas feed for LNG Canada will come predominately from BC, and whilst that in itself will certainly benefit the Canadian gas market overall, the outlook for Canada remains bleak in our view. Lobbying for the accelerated retirement of all Alberta coal fired power plants to natural gas alternatives may be an environmentally acceptable and economically beneficial alternative?