Canadian natural gas producers have been battered by relentless headwinds in recent years and the challenges ahead look daunting, looming like summer storm clouds hanging over the Prairies.
But even with the problems created by low prices, shrinking exports, massive production increases in the United States and depressed drilling activity at home, there are slivers of hope on the horizon — if the sector can get through the gale.
A new report by the Canadian Energy Research Institute predicts natural gas production in the country is likely to rise over the next two decades along with prices. As well, demand inside Canada will continue to grow.
The country also has the potential to remain a net exporter of natural gas throughout the next 20 years — although Western Canadian pipeline exports could fall to one billion cubic feet per day by 2020, a far cry from levels topping 10 bcf seen a decade ago.
It’s just that the future will be a lot brighter — and more certain — if Canada finally approves any of the liquefied natural gas (LNG) projects proposed for the country’s Pacific coast.
“We’ve come to a significant crossroads,” says Dinara Millington, CERI’s vice-president of research. “Do we want Canada to be an international player in the LNG game or not? It’s pretty clear where the industry stands on this. It’s not quite clear where the governments are.”
The report points out the many hard realities confronting the sector today.
Prices are low, drilling is down and pressure grows to lower costs.
Annual Canadian gas output is projected to fall below 14 billion cubic feet per day over the next four years — it stood at more than 17 bcf a day just a decade ago — before eventually climbing above 21 billion cubic feet per day by 2037, according to CERI.
“The ramp-up in production in 2020-2022 results from increased demand and improvements in well drilling, leading to reduced production costs, particularly in Alberta,” states the institute’s Canadian Natural Gas Market Review.
Aside from prices, the sharpest challenge ahead comes from south of the border, where U.S. gas output is expected to expand by a staggering 72 per cent by 2037.
Powered by the massive Marcellus resource, U.S. shale gas production alone is projected to ramp up 117 per cent and more gas is forecast to find its way into Central Canada.
CERI also notes the United States is “on the verge of transitioning from a net importer to a net exporter” of gas, likely in 2016-17.
If all this sounds like a prescription for more headaches in the Canadian gas sector, you’re right.
“We’ve seen U.S. producers start to eat and erode our traditional markets in Ontario, Quebec and Northeastern U.S., so for Western Canadian gas producers, the last few years have not been great,” says Gary Leach, president of the Explorers and Producers Association of Canada.
“The majority of gas producers are struggling and there’s a lot of anxiousness.”
But here’s the counter-narrative.
Looking ahead 20 years, the price of natural gas is expected to rebound, while Canadian production is “expected to increase after 2019 and remain stable,” CERI states.
The report notes the Montney formation will continue to lure interest from Western Canadian producers.
Traditional markets for Western Canadian gas in the U.S. Midwest and Central Canada will see more incursions from competitors, but there will be more overall gas demand south of the border.
In Canada, demand for gas is expected to increase to 18 billion cubic feet per day because of our growing population and higher industrial use.
Another boon could come from government climate change policies and the shift away from coal-fired power generation to gas, which emits 45 per cent less carbon dioxide than coal.
“Canada could remain as a net exporter of natural gas through the next 20 years,” the report concludes.
However, the ray of hope for the sector’s future comes with the assumption Canada will approve and build an LNG terminal on the British Columbia coast — something that hasn’t yet occurred.
If that happens, CERI projects an increase in exports of four billion cubic feet a day. If it doesn’t happen, Millington says the idea of ramping up production won’t materialize and Canadian gas output will stagnate or dip.
“We might literally miss the boat,” she warns.
A separate report by FirstEnergy Capital Corp. says the longer-term evolution of the Canadian gas market is “looking murky at best.”
Earlier this year, Royal Dutch Shell’s LNG Canada project saw a deferral of a final investment decision, while the Pacific NorthWest LNG project led by Petronas is moving with a “glacial pace” through regulatory and federal approval, it notes.
Ottawa has indicated a decision will be made by the end of September.
“We suspect that any further delays at any level of government will kill the project,” says FirstEnergy. “If such an event does occur, we think this could jeopardize any new form of LNG development on the British Columbia coastline until well into the next decade.”
That’s the downside to this picture.
With more inaction or delay, the hope of new LNG terminals on the B.C. coast — creating new markets for domestic gas producers — could vanish.
And for a Canadian natural gas industry that’s already endured a prolonged downpour, it would mean more trouble in the forecast ahead.
Chris Varcoe is a Calgary Herald columnist.
cvarcoe@calgaryherald.com