|
Gas exports to U.S. under fire Pressure builds in Canada to avoid price run-ups; Vollman warns of backlash Gary Park Petroleum News Calgary Correspondent
Governments and the energy sector needs to move swiftly to head off a possible Canadian consumer backlash against natural gas exports to the United States, said Ken Vollman, chairman of Canada’s National Energy Board.
Apart from the urgent need to rebuild reserves and stem wild price swings, governments may have to intervene and lock in gas at a fixed price or offer rebates to low-income households, he told the Canadian Association of Members of Public Utility Tribunals on May 5.
He said the challenge is to offset shrinking production from the mainstay Western Canada Sedimentary Basin until North America gains relief from imported liquefied natural gas, development of coalbed methane and new supplies from offshore regions and the Arctic.
Vollman warned that the “big (price) run-ups we see from time to time could cause a public backlash” in Canada against exporting close to 60 percent of the natural gas it produces to the Lower 48.
But he did not think that returning to a re-regulated industry, after 18 years of letting the market rule and 15 years of free trade treaties, would a likely solution. Short-term the problem He said the federal regulator will instead try to impress on E&P companies that exploring for new reserves is in their best interest.
“We have a number of options, but the problem is that most are in the medium term,” said Vollman. “We have to get through the next three years before we add incremental supply.”
In that time, continuing high prices could erode North America’s competitiveness if gas-reliant industries, such as the petrochemical sector, took flight to regions where energy costs are lower, he said.
Peter Tertzakian, chief energy economist with ARC Financial, told a Conference Board of Canada forum last month that he does not subscribe to forecasts that U.S. gas consumption will climb to 30 trillion cubic feet a year from the current 22 trillion.
He said the cost of raising output to that level over a short period would be more than consumers were prepared to pay unless there was a sharp increase in energy efficiency and conservation of gas. Slump in storage levels Vollman’s remarks came in the wake of a slump in storage levels to historic lows of about 620 billion cubic feet in the United States (since rebuilt to about 690 billion) and 80 billion cubic feet in Canada (60 billion below norms) following a colder-than-normal winter.
Judith Dwarkin, an economist at Ross Smith Energy Group, told The Globe and Mail newspaper that “the price is very much driven by low storage levels. We’re not seeing the up-tick in supply.”
As a result, there is a growing expectation among analysts that gas prices won’t follow tradition and ease off during spring and summer, simply because demand is up and production is fading.
Canadian drillers losing ground Among the support sectors in Canada, the Petroleum Services Association of Canada and the Canadian Association of Oilwell Drilling Contractors find they are losing ground, even with drilling at record levels.
Petroleum Services Association President Roger Soucy said there will not be any production surpluses this year even if gas wells reached the projected count of 11,350. The oilwell drilling contractors reported that drilling activity has nosedived from a first-quarter rig utilization rate of 86 percent to under 20 percent and will likely focus over balance of 2003 on shallower prospects, rather than the deeper, potentially higher-yielding targets.
But Hank Swartout, president of Precision Drilling, Canada’s largest driller, told analysts on April 30 that he expects a “great 2003,” more growth in 2004 and upwards of 20,000 oil and gas wells in 2005, compared with this year’s top forecast of 18,300. Many Canadian companies in U.S. hands If the pressure does build on E&P companies to step up the pace of exploration the heat will also land on U.S.-based companies who now account for 40 percent of Canada’s production and reserves.
A newly released FirstEnergy Capital report said the pace of U.S.-driven takeovers has reduced the number of large Canadian companies to six from 41 in 1997. Of the 35 that were acquired or merged, U.S. companies accounted for 21.
Five U.S. firms are also among the 15 largest holders of exploration land in Western Canada and a similar number ranks among the top 15 drillers.
However, the jury is still out on whether these new arrivals will generate a net benefit to the Canadian industry.
| 