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Canada is the biggest exporter of natural gas (NG) to the U.S. market. As of 2004, Canada supplied the U.S. with about 9.9 BCF/day, or 16% of U.S. average daily NG consumption . During the 1990’s, Canada’s exports helped offset declining domestic NG production, and therefore helped keep prices reliably low. Therefore, the status of Canada’s NG industry is of critical significance to U.S. NG consumers.
Unfortunately, Canada’s NG industry faces challenges that have impacted, and will continue to impact, the entire North American NG market. For one thing, Canada’s conventional gas fields are mature. Annual production has either peaked already (in 2001-2002), or at best entered a “bumpy plateau” phase. Canada’s stated NG reserves peaked in 1983 and continue to decline, despite record-breaking drilling activity. While conventional supplies are declining, internal Canadian demand for NG is increasing in sectors such as power and oil sands production. Therefore, Canada’s net NG exports are at risk for declining faster than their overall production. This situation could lead to continued increases in U.S. NG prices over the next few years.
US Import Data
The U.S. produces a significant, but declining, share of its own NG demand. As of 2004, the U.S. was dependent on imports from Canada for about 16% of the average daily NG consumption, with an additional 3% of consumption coming from imported LNG . U.S. NG production peaked in 1973, and has basically declined or flatlined since then . Therefore, the U.S. is highly dependent on imports to meet incremental load growth.
Canada greatly increased production and transmission capacity during the period 1988-2001. During this period, Canada acted as a swing producer for the North American market, and helped reduce NG price pressure despite large increases in overall consumption. However, since 2001, their exports to the U.S. have been flat (see Fig. 1).
Canadian Production Data
We examined Canadian NG production data to get a clearer picture of why Canadian exports have dropped off since 2001. One answer is that their exports have followed their overall production on a general downward trend since 2001-2002 (see Fig. 2). Their 2004 production was about 2% lower than their 2002 production, despite a 67% increase in NG well drilling activity over the same period.
There is usually a time lag between the completion of drilling a well, and the commencement of active production. Therefore, the chart in Fig. 2 does not prove conclusively that Canadian production has peaked for good. Regardless, the graphic indicates that since 2002, large increases in drilling activity have yet to result in any meaningful production increases. It also supports the concept that many of the large, conventional gas fields have entered a decline phase, and that development of smaller-sized and unconventional fields is barely offsetting decline rates elsewhere.
Canadian Reserves Data
Some would argue that when NG prices increase, producers have an incentive to drill more wells, resulting in greater supplies and reduced prices. Canadian producers are, in fact, drilling more wells. However, this activity is not resulting in significant additions to Canada’s reserves. Since 1996, the number of NG wells drilled annually in Canada has increased by 312%. Meanwhile, Canada’s stated NG reserves have declined by 14% (see Fig. 3). These trends support the idea that Canada’s conventional fields are in decline.
Natural gas reserve data can be a good indicator of future production trends. When reserve levels increase significantly, production levels will theoretically follow. However, Canadian NG reserves peaked in 1983 at about 100 TCF, and are down about 44% to 56.5 TCF as of 2004 .
Canada’s Internal Demand
Canada has long been a net exporter of energy and commodities. However, recent population growth and economic growth have increased Canada’s internal demand for energy. Their internal consumption of NG in particular has increased by 12% between 2001 and 2004. Over the same period, overall Canadian production declined by 2% (see Fig. 4). These trends indicate that Canadian exports are being squeezed more by internal demand growth than by supply shortfalls. Therefore, U.S. NG consumers should be concerned more about Canada’s net export capability than about their overall production levels.
The growth in Canada’s internal NG demand is being driven by two sectors: electrical generation and oil sands production.
Natural Gas for Electrical Power Generation
Canada’s electrical generation mix relies predominantly on nuclear and coal-fired capacity. However, gas-fired capacity is becoming more prevalent as old plants are upgraded or replaced. According to the National Energy Board of Canada, gas-fired capacity made up only 4% of Canada’s total capacity in 1995, and in 2004 made up 9% of the total generation capacity . About 57% of the new generation capacity installed in Canada since 1998 is gas-fired . Thus, gas-fired capacity makes up a small but growing fraction of Canada’s capacity mix.
The Ontario Ministry of Energy (OME) currently plans to eliminate its entire fleet of coal-fired generation capacity by 2009, with much of the phase-out occurring by 2007 [6,7]. In all, the phase-out encompasses over 7,500 MW of coal-fired capacity. OME plans to replace part of this capacity with nuclear and renewable sources. However, due to a variety of constraints, much of the replacement capacity will have to be gas-fired. One observer estimates that if all of Ontario’s coal capacity were to be replaced with gas-fired capacity, it would result in an incremental NG demand of almost 1 BCF/Day , or almost 6% of Canada’s current production.
In summary, Canada is actively moving towards an electrical system that is much more dependent on NG. This could have a significant impact on net NG export capability.
Natural Gas for Oil Sands Production
As global crude oil prices have risen over the last few years, Alberta’s oil sand has become comparatively more cost effective as a source for synthetic crude. However, the process for converting heavy bitumen into synthetic crude is energy intensive, regardless of comparative price. The National Energy Board of Canada estimates that if oil sand production increases as planned, and if conversion efficiency improves, oil sand projects will require about an additional 1 BCF/day of purchased NG by 2010, and about an additional 1.5 BCF/day by 2015 . These values are above and beyond the planned increase in the use of gasified bitumen to help power recovery and conversion processes.
Taken together, the following observations indicate that Canadian NG exports will likely be increasingly constrained for the foreseeable future.
Canadian NG production likely peaked in 2001-2002. Since then, Canadian well drilling activity increased by 67%, but overall production decreased by 2%. This may indicate that many of the major conventional gas fields are in decline, and that much of the new well development is in smaller fields with greater production challenges.
Canadian NG reserves peaked in 1983. Despite a long term trend of increasing exploration activity, reserves have declined by 43% since 1983. The fact that reserves are declining casts doubt on Canada’s ability to significantly increase production to offset internal demand.
Rising demand for NG in Canada’s power and industrial sectors could significantly reduce their net NG exports, which in turn could impact North American NG prices. Canada’s incremental internal NG demand may be on the order of 2 BCF/Day by 2010, for electrical power in Ontario and oil sand production in Alberta alone. Increasing the use of NG for industry and power in other areas of Canada could add further to incremental NG consumption.
U.S. Energy Information Administration, U.S. Natural Gas End Use Data, U.S. Natural Gas Import Data, Country Analysis Briefs—Canada (http://www.eia.doe.gov)
Natural Resources Canada, Natural Gas Division report, “Canadian Natural Gas: Winter 2005-2006 Outlook” November 2005 (http://www2.nrcan.gc.ca/es/erb/CMFiles/WINTER_MARKET_OUTLOOK_2005_ENGLISH206KCY-25112005-2389.pdf)
Natural Resources Canada, Natural Gas Division report, “Canadian Natural Gas: Review of 2004 and Outlook to 2020” January 2006. (http://www2.nrcan.gc.ca/es/erb/CMFiles/CANADA_GAS_REVIEW_&_OUTLOOK_ENGLISH209NSK-14022006-4471.pdf)
National Energy Board of Canada, “Natural Gas for Power Generation: Issues and Implications,” June 2006. (http://www.neb-one.gc.ca/energy/EnergyReports/EMAGasPowerGeneration2006_e.pdf)
National Energy Board of Canada, “Canada’s Oil Sands: Opportunities and Challenges to 2015, An Update”. June, 2006. (http://www.neb-one.gc.ca/energy/EnergyReports/EMAOilSandsOpportunitiesChallenges2015_2006/EMAOilSandsOpportunities2015Canada2006_e.pdf)
Ontario Ministry of Energy, News Release, “McGuinty Government Unveils Bold Plan to Clean Up Ontario’s Air”, June 15, 2006. (http://www.energy.gov.on.ca/index.cfm?fuseaction=english.news&body=yes&news_id=100)
CBC News, “Ontario Delays Closing Worst Coal Plant”, June 16, 2006. (http://www.cbc.ca/story/canada/national/2005/06/15/plant050615.html)
Rogers, J.T. “Options for Coal-fired Power Plants in Ontario,” Canadian Nuclear Society Position Paper, September 27, 2004. (http://www.cns-snc.ca/media/CNS_Position_Papers/Ontario_coal.pdf)
Canadian Association of Petroleum Producers (CAPP) Oil and Gas Data (http://www.capp.ca/raw.asp?x=1&dt=NTV&e=PDF&dn=80642)