Lacking LNG, Canadian Gas Producers Look Inward
It’s a chicken and egg question. Does demand follow supply, or does that supply chase demand?
In the mid-2000s, Canadian natural gas producers were challenged to produce enough gas to keep the existing market satisfied. In the face of what many perceived as a looming supply crunch, Canadian producers drilled 16,000 wells in 2005 to maintain production at about 17bn ft3/d, or a fifth of North America’s 100bn ft3/d market.
That began to change near the end of the decade when the advent of horizontal drilling and hydraulic fracturing brought a 300-year supply in Canada alone and upended markets across North America. But demand failed to keep pace with massive new tight gas and shale deposits unlocked in places like Pennsylvania and Texas and the looming supply deficit very quickly became a massive supply glut.
Speaking to Natural Gas World’s Canadian Gas Dialogues webinar series on September 28, ARC Resources chair Hal Kvisle, who formerly headed gas pipeline giant TransCanada, explained that the resource base north of the border has grown “exponentially” in the last two decades. “In the 40 years I’ve been in the business gas was always seen as the fuel of the future,” Kvisle said. “Today we have more gas than we can possibly sell.”
Despite the gains in productivity that have made that gas accessible, repercussions for Canadian producers have been extreme. The US, which was once the country’s largest export market, is now its largest competitor, challenging homegrown producers to find new markets for their product in the face of falling prices.
Unlike the US, which has access to abundant supplies located near transportation infrastructure in the Gulf of Mexico, Canadian gas remains land-locked, without access to potentially lucrative global LNG markets.
While projects like the C$40bn (US$30bn) LNG Canada facility in Kitimat, on BC’s northern coast, would seem to offer a much-needed outlet for Canadian producers to growing markets in Asia, the Canadian gas industry has been forced to look inward as more than a dozen proposed LNG projects elsewhere in BC and in Quebec and Nova Scotia have fallen off the books or been delayed indefinitely due to regulatory uncertainty and lack of investment.
Alberta – which accounts for the lion’s share of Canadian gas output – has been forced to look further up the value chain for new and expanded markets, Dale Nally, who was sworn in as Alberta’s first-ever associate minister of natural gas in 2019, told the webinar. This fall, the province will launch its Alberta Petrochemicals Incentive Program, which aims to attract C$30bn of new investment by 2030 through a combination of subsidies and financial tax breaks to make Alberta a global manufacturing “powerhouse” of plastics and other products.
While that may seem impressive, the US has seen more than US$250bn of new petrochemical investment since 2010. On the bright side, there is no place to go but up, Nally said: “Petrochemicals are not a silver bullet, but one of many opportunities.”
But it’s not just secondary processing that offers relief. Opportunities exist to electrify transportation networks and replace coal and diesel as a primary fuel for power production, including the expansion of hydrogen.
While electrification would seem to offer a potentially massive market for new power generation, it comes at a cost. According to Dale Friesen, senior vice-president of corporate affairs for ATCO, one of the country’s largest energy distributors, more than C$62bn would be required to electrify residential and industrial heating in Alberta alone.
And the proliferation of fast charging stations to support the growth of electric vehicle sales would add C$3,000 per vehicle to bolster existing power infrastructure to handle the additional loads, Friesen added – an “unintended consequence” of reducing emissions. “To meet the Paris Accord you have to electrify everything.”
The good news is that Canadian producers have proven to be adept at reducing costs and increasing the efficiency of their transportation networks, which means Canadian supply remains competitive in existing markets in both Canada and the US, said Tracy Robinson, TC Energy’s executive vice president and president of both its Canadian Gas Pipelines division and the C$6.6bn Coastal GasLink pipeline that will supply gas to LNG Canada.
“Our gas can still be competitive,” she said, while lamenting Canadian regulatory policies that have hampered expansion of TC Energy’s Nova Gas Transmission Limited (NGTL) system, which connects supplies in Alberta and northeast BC to its Canadian Mainline and to export markets in the US.
The company has been waiting more than four years for federal approval of a C$2.3bn expansion of the NGTL system, which was further delayed this spring by the Covid pandemic. While the latest setback was unavoidable, it has still cost TC Energy the 2020 summer construction season, and the expansion, initially expected to be completed in 2021, will now not be finished until the following year, media reports say.
And that is another indication, Robinson complained, that “lead times are too long” when measured against rapidly evolving market conditions. “There’s a lot of gunk in that engine,” she quipped.
Despite the barriers, panelists agreed that natural gas will remain an integral part of the Canadian energy mix, and Canada can still play a role in a decarbonising global market, assuming technical and regulatory hurdles can be overcome. But that, Kvisle said, remains a big ask. “We have to get our act together if we want to be competitors in that (international) market.”