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LNG dangles as big gas prize Producers in US, Canada, count heavily on LNG exports to support operations; little hope for Alberta, where gas in downward spiral Gary Park For Petroleum News
While gas producers in the United States and Canada battle for a diminishing share of the “home” pie, hopes for a resurgent market increasingly focus on LNG exports.
For now, though, it’s a much grimmer mood in Canada, which has seen the share of its production destined for the U.S. shrink from two-thirds to one-half of output in the last five years.
Consider Alberta, still the mainstay gas region, where royalties have plunged to an estimated C$965 million this fiscal year from C$6 billion in 2006-07, with field activity falling to about 1,000 wells this year from 16,000 during the bonanza years.
Production in the province has declined to about 10 billion cubic feet a day this year from 14 bcf a day in 2006, while the industry has seen one of its previously key markets in the U.S. Northeast evaporate as the Marcellus shale has raced to almost 8 bcf a day from 2 bcf a day in 2005 and, according to Peter Howard, president of the Canadian Energy Research Institute, could be destined for 23 bcf a day.
B.C. immediate beneficiary Even if LNG export projects do get off the ground, the immediate beneficiary will be British Columbia, which holds the largest untapped resources in its northeastern corner and the best access to liquefaction and tanker terminals on the Pacific Coast.
Howard doubts LNG exporters from Canada will include Alberta production in their mix any time soon because of their focus on the more cost-effective Montney formation in British Columbia.
Those looking for a shred of hope were offered a morsel by Mike Ekelund, assistant deputy minister at Alberta Energy, when he spoke to a LNG conference in Calgary.
He said that based on years of cooperation between Alberta and British Columbia to promote the natural gas industry there should be opportunities for both provinces to supply international markets through LNG terminals.
Ekelund said the two provinces have for decades shared gas pipeline networks and he is counting on working with British Columbia “to expand the network to provide buyers with access to world class resources.”
But the chances of British Columbia giving up much, or any, of its dream to cash in on LNG is remote.
Howard acknowledged the reality. “There are no easy answers for Alberta producers,” he told the Financial Post. “The next several years are going to be challenging.”
Ziff sees B.C. in lead The importance to North American producers of seizing a role in the LNG industry is reflected in a new forecast by Calgary-based Ziff Energy, now a division of Solomon Associates, which predicts British Columbia has the best chance of leading a production recovery in Canada.
If export projects from the Pacific Coast are up and running by 2018 they will set the stage for British Columbia gas production of more than 4 bcf per day by 2020, more than a four-fold increase from current output, the study said.
Otherwise Alberta will be left to rely on its oil sands operations and a shift to gas-fired power plants which the study predicted should see demand rise to between 5 bcf and 6 bcf a day in 2020, compared with present levels of 3.4 bcf per day.
Bill Gwozd, senior vice president of gas services, forecasts 90 percent of Alberta’s growth will come from the oil sands.
Ontario, by far Canada’s most populous province at 13 million people, is forecast to top 3 bcf a day, an increase of 500 million cubic feet per day as power generation shifts to gas from coal.
Collective revenues tumble But Peter Tertzakian, chief energy economist at ARC Financial Corp., also puts the numbers into a more rigorous perspective, noting that Alberta producers collective revenues have tumbled C$30 billion from their 2005 peak and production has nosedived 30 percent as U.S. shale plays have claimed market share from Western Canada, led by the Marcellus which now accounts for 13 percent of U.S. output.
Tertzakian said Marcellus expansion is “unlikely to slow, with high quality rocks making the cost of the gas relatively low” and the play’s close access to major consuming regions.
He said the best chance of recovery for Western Canadian producers is accessing Asian markets with LNG, noting that British Columbia gas operations are “ramping up output in anticipation.”
Gwozd conceded that cheaper types of coal are also causing a shift away from gas by power producers and said that could be a short-term issue until governments start tackling climate-change concerns.
He suggested there could also be good news on the horizon, with the Ziff report predicting “very strong” gas demand in Canada and the Southwest region of the U.S., “moderate” gains in the interior West and “minor” gains in the Midwest and Northeast, while the Southeast and Pacific Coast remain flat.
Backing off predictions For now, many forecasters are having to back off recent predictions that North American demand would rise to 30 trillion cubic feet a year, or about 82 bcf a day. Current consumption is in the range of 72 bcf-80 bcf a day, but Solomon Associates is counting on 95 bcf a day by 2020, with the 30 tcf-a-year mark being reached in 2016 or 2017.
Gwozd said world LNG demand for gas should double to 60 bcf a day by 2020.
Calgary-based Peters & Co. said that although 20 percent fewer rigs are drilling for gas than last year, average U.S. production for 2013 is likely to remain unchanged at 66 bcf a day, edging up to 67.4 bcf a day in 2014.
“Production from shale gas drilling continues to drive supply growth in the U.S. with the Marcellus and associated gas from oil/liquids plays — including the Bakken, Eagle Ford, Utica and parts of the Permian — offsetting declines that have occurred in all other areas over the past year,” the investment dealer said.
Peters said U.S. shale plays accounted for about 19 bcf a day, or 32 percent of U.S. production, in 2010 and, by the end of 2014, should be at 50 percent or 34 bcf a day, further stiffening competition for Western Canadian gas.
Bentek is counting on U.S. production rising by about 23 percent over the next five years to 80 bcf a day, driven by more efficient shale gas drilling, projecting year-end 2013 production of 65 bcf a day.
US LNG exports Jack Weixel, director of energy analysis at Bentek, told a Pittsburgh conference the forecast is based on a steady rise in gas use for manufacturing and power generation, while counting on LNG exports starting in 2015 or 2016.
Based on those assumptions, he forecast gas prices will reach a 2018 average of $4.09 per million British thermal units compared with the current $3.40, with most U.S. producing basins seen as profitable at about $2 because of associated hydrocarbons, such as crude oil and gas liquids.
At $4, Weixel said all U.S. producing basins would be profitable.
He said U.S. LNG exports should consume 8.8 bcf a day by 2023 based on signed memoranda of understanding between shippers and customers covering 11.6 bcf a day.
Weixel doubted that LNG will have much impact on U.S. domestic gas prices, meaning the U.S. will “be the next great natural gas exporter by the time we get to 2018 because we can afford to.”
Of the challenges facing gas, he said the chief threat could be posed by legislation banning hydraulic fracturing.
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