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Home > Speeches and Presentations > Speeches and Presentations 2005 > Canadian Natural Gas Exports - Issues and Opportunities

Canadian Natural Gas Exports - Issues and Opportunities

Gaétan Caron
Vice-Chairman
National Energy Board

Natural Gas Forum
Montreal, QC

10 March 2005

NEB's Responsibilities

The National Energy Board (the NEB or the Board) is an independent federal regulatory agency that was established in 1959 and regulates these specific aspects of the energy industry:

• the construction and operation of inter-provincial and international pipelines;pipeline traffic, tolls and tariffs;
• the construction and operation of international power lines;
• the export and import of natural gas;
• the export of oil and electricity; and
• Frontier oil and gas activities.

In addition to its regulatory responsibilities concerning facilities, frontier oil and gas activity, and international trade of energy, the Board also has an important role in monitoring energy markets and reporting on the functioning of markets to Canadians. In its advisory capacity, the Board may at its own initiative, or at the request of the Minister, provide energy advice to the Minister of Natural Resources in areas where the Board has expertise derived from its regulatory functions; and carry out studies and prepare reports into specific energy matters; and monitor current and future supplies of Canada's major energy commodities.

The focus of my presentation today is on the export of natural gas, the Board's role in the regulation of natural gas exports from Canada, and what it may mean to Quebec and Canada in terms of possible issues and opportunities in the future.

Outline

The format of this discussion will be:

• High level background and context on natural gas production and consumption in Canada
• From that, some history and context on natural gas exports to the United States
• Discussion of relevant energy policy and regulations that determine the rules for natural gas and energy exports and how the NEB goes about its role in regulating exports of natural gas from Canada
• Finally, discussion on the possible environment in coming years, what it may mean for exports and the possible issues and opportunities to Quebec and Canada.

North American Gas Supply

Starting with an overview of Gas Supply (estimated for year 2004).

This slide provides an overview of North American natural gas supply. A continental picture is appropriate since we are in a very integrated market where gas is freely traded across North America.

Observations:

Canadian natural gas supply is about 17 bcf/d with the majority from Western Canada. In fact, the Western Canada Sedimentary Basin (WCSB) accounts for just over 20% of gas produced in North America.

About 0.4 bcf/d comes from offshore on the east coast of Canada and about 50.5 bcf/d from the Lower-48 states in the USA.

In total, about 70 bcf/d of gas is produced in North America, which is supplemented by imports of natural gas in the form of LNG to meet continental natural gas requirements. Last year, an average of approximately 1.7 bcf/d of Liquefied Nautral Gas (LNG) was imported into North America (and on some months over 2 bcf/d).

Simplified North American Gas Flows

This slide illustrates where the natural gas is consumed.

As you can see, Canada produces more gas than it consumes (about 7.5-8 bcf/d), which allows just over half of the gas it produces to be available for export to other markets in the U.S.

We are the only net gas exporter on the continent.

The United States is by far the largest consumer of natural gas and it imports about 15 percent of its requirements from Canada. Another 2 percent is imported as LNG from Trinidad & Tobago, Algeria, Australia, and Qatar.

Mexico is a net importer of about 1 bcf/d of gas from the United States.

North American Gas Pipeline Grid

The exports and trade of natural gas are made across a integrated network of pipelines across North America.

• This allows consumers the ability to buy and transport natural gas produced in other regions
• Efficient trading systems and network of pipelines also serves to tie the price of natural gas across North America, where under normal circumstances the price across locations would follow similar patterns/trends except for differences due to transportation costs, and local supply/demand variations (weather, pipeline operations, capacity constraints, etc).

Significant locations for trade of Canadian gas include:

• AECO-C in Alberta (where most of Canadian gas is produced)
• Henry-Hub or NYMEX in Louisiana (from previous slide, the Gulf Coast is the largest producing region in North America)
• Smaller trading points (but important for Canadian markets) include:
  • Dawn (esp. for Ontario and Quebec markets)
  • Sumas/Huntingdon (for British Columbia)

North American Gas Prices

The North American market is very well integrated and regional natural gas pricing tracks closely with the prices at major indices. But of course there are still variations due to differences in transportation costs at various locations, and supply and demand variations in each region such as impacts from severe weather, production disruptions, pipeline operations, capacity bottlenecks, and just trading volume.

An important observation from this slide is to note the relative increase in price and volatility in recent years which is indicative of the trade and balance in the supply and demand of natural gas in the North American market. As the balance remains tight, not only is the price higher relative to periods where there is more supply, but the price also becomes more reactive to changes in supply or demand - for example due to weather, drastic changes to alternate fuel such as crude oil, or pipeline and facility impacts.

Canadian Natural Gas Disposition

In 2004, about 53% of Canadian gas was destined for export markets, while 46% was used in Canada.

The upper line in the chart represents available gas to end users, and the colored areas depict the split between export and domestic markets.

In the past, after deregulation in the mid-1980s, gas production increased rapidly, growing by almost 10 bcfd by the turn of the century and the WCSB satisfied almost all incremental U.S. gas demand. However, as production from the WCSB now appears to be flattening out, it will be more difficult to continue to satisfy the incremental requirements in domestic and export markets.

NEB-Regulated Energy Exports

Natural gas exports are important to Canada for a number of reasons. This includes the jobs and investments created from the equipment and people involved in producing, transporting, and distributing the gas, but also from the revenue obtained from selling of the commodity.

In 2004, in terms of revenue - natural gas exports accounted for more revenue to Canada than any other energy. Revenue from natural gas exports exceeded $26 billion, although about $3 billion of gas was imported into southern Ontario. As a result, there is a net revenue or a positive balance in natural gas trade in the order of $23 billion for gas exported from Canada.

Oil and electricity are also traded. Oil & products export (gross) revenue for 2004 was $26 billion and 5.8 billion respectively. 2004 electricity exports were about $1.8 billion with the balance of trade in electricity (after deducting electricity imports) about .7 billion.

By comparison, according to Statistics Canada:

• Total value of all Canadian exports in 2003 was about $400 billion (about $330 billion of that with the United States)
• Total value of all Canadian imports in 2003 was about $342 billion (about $240 billion of that with the United States)
• The overall balance of trade was $58 billion revenue to Canada
• Balance of all trade with the United States was almost $91 billion.

From this we can see that energy exports are a very significant component of Canadian trade and net natural gas exports correspond to about a quarter of our balance of trade with the United States.

NEB Natural Gas Demand Scenarios for Canada

Looking ahead to the future - this slide shows a plausible scenario for growth in Canadian natural gas demand from the NEB's 2003 report, called "Canada's Energy Future: Scenarios for Supply and Demand to 2025".

The report addressed the forces impacting Canada's energy environment, and the uncertainties and issues associated with highly competitive and evolving energy markets.

We can see from the chart that natural gas is expected to be in strong demand. That is due to its clean burning properties and the high efficiency with which it can be utilized both in space heating and in electric power generation.

I also note that the Energy Information Administration in the United States has also projected similar growth in natural gas consumption for the U.S. over this timeframe.

Canadian Natural Gas Production

While the WCSB has satisfied a large portion (~75%) of incremental demand in export markets in the last 2 decades, production has recently shown signs of flattening out and it may be more difficult for this basin to satisfy all of the continents incremental requirements.

Overlaying the projected demand on the outlook for natural gas production in Canada, we can make the following observations:

• In order to meet Canada's gas demand and the demand for our gas exports, there is quite a gap to be filled to compensate for possible declines in WCSB production.
• While the WCSB will remain a prominent source of natural gas for years to come, continuing effort and resources will be needed to offset decline.
• Also, other sources of gas from less conventional sources or new areas may likely be required. E.g., supply from other regions such as East Coast and North, or natural gas from Coal (NGC).
• In addition to our domestic supplies, there have also been numerous proposals to implement facilities to import LNG to North America. A number of these are proposed for Quebec, the Maritimes, and in British Columbia. Observers believe that not all of the proposals in North America will proceed.

From this Canadian perspective, you can see that relative to the past we are now in an environment where it will likely be more difficult to continue to support the same kind of growth in both Canadian and export natural gas markets.

This would suggest that new incremental gas supplies are required in North America or/and that North American consumption and attitudes toward natural gas and energy will require fundamental change.

Natural Gas Environment

In summary, the key characteristics of the current natural gas market are:

• Integrated North American market where natural gas can be bought from many supply sources and delivered to any market centre through an extensive North American pipeline grid. Moreover, regional supply and demand forces are felt throughout the marketplace.
• Natural gas consumption will continue to expand in North America, driven primarily by the growth in gas-fired generation.
• Gas production in Canada and continental United States are showing signs of flattening. Further, the performance of wells offshore Nova Scotia have led producers to commence the development of the next tier of fields earlier than expected just a few years ago.
• In the United States, production growth in the Rockies and areas of the Gulf coast have been unable to offset declines in other basins. In all, continental gas production has recently been flat.

However, the market does respond to the pressures of growing demand and flat or declining supplies with higher prices and short-term price volatility. In turn, the market has eliminated up to 5 bcf/d of demand over the past few years (much of this in energy intensive and price sensitive industries such as chemicals and fertilizers), although some of this is offset by growth in new demand for power generation.

Annual Gas Exports by Type

The market has also become very short-term in nature with pricing and contracts structured to respond to dynamics in the market. Exports are no different.

Currently about 83% of exports are moved under short-term orders (for terms of less than 2 years).

Canada's Energy Policy

It is within this context that I wish to discuss Canada's energy policies and the NEB's responsibilities with respect to regulation of natural gas exports.

Canada and its energy policies are committed to market-based principles where natural gas may be freely traded in an integrated North American market. The policies affecting natural gas trade and exports were formed in the mid-1980's in response to initiatives towards North American free trade; and from other Federal/Provincial agreements on natural gas markets and pricing.

Specifically:

• The Western Accord (March 1985) between the Federal government and the provincial governments of Alberta, Saskatchewan, and British Columbia (the producing provinces at that time) stated that a more flexible and market-oriented pricing mechanism was desired for the domestic pricing of natural gas.
• The Agreement on Natural Gas Markets and Prices (the "Halloween Agreement", signed October 31, 1985) established the principle that the price of gas would be determined by a negotiation between buyers and sellers, with the intent to foster a competitive market for gas in Canada. In addition this agreement established the conditions under which gas exports under licence would be permitted.

Natural Gas Exports and Energy Policy

The North American Free Trade Agreement (signed in January 1994) solidified in law the policies adopted in the mid-1980's.

Within this market, the export and import of natural gas from Canada is authorized by the Board under either long-term licences or short-term orders. For authorizations exceeding 2 years, the Board considers authorizations of long-term licences which may be issued for up to 25 years. These require a public hearing to evaluate various implications and are subject to Governor in Council approval.

On the other hand, short-term orders for a maximum period of two years can be issued without restriction and do not require a public hearing nor Governor in Council approval. Orders may also be issued for exporting very small volumes (less than 30,000 m³/d) for terms greater than 2 years, up to a maximum of 20 years - we have very few of those and, therefore, I will not refer to those exceptional cases in the rest of my remarks today.

Under the principle of freely operating markets, our main criteria in authorizing exports is that Canadian have the same opportunity to access the energy or natural gas as the proposed export.

The Board may also limit exports on specific grounds such as upstream environmental impacts where a necessary connection can be demonstrated between the export and the specific upstream facility and activity.

Natural Gas Export Regulation

To illustrate,

Within this framework, the export and import of natural gas from Canada is authorized by the Board under either long-term licences or short-term orders.

Short-term orders for a maximum period of two years can be issued without restriction and do not require a public hearing nor Governor in Council approval. An application for this is typically only a few pages, and provides information on the company seeking the authorization and the term and details of the proposed export. The Board's target to process this type of application is a 48 hour turnaround time, which we have met or exceeded virtually 100% of the time.

However, for export authorizations exceeding 2 years, the Board considers long-term licences which may be issued for up to 25 years. These require a public hearing to evaluate various implications and are subject to Governor in Council approval. The public hearing may be oral or written (which will depend on the nature and issues with each application):

Long-term Natural Gas Exports

A process called the "Market-Based Procedure" or MBP (outlined in Board decision GHW-1-91), is used by the Board to ensure that natural gas licenced for export is surplus to reasonably foreseeable Canadian requirements. The MBP is comprised of two components:

Export Licence Considerations

In considering an application for long-term exports, the NEB must be satisfied that the criteria as outlined in the MBP are met, to ensure that natural gas licenced for export is surplus to reasonably foreseeable Canadian requirements.

The MBP also seeks to ensure that export arrangements meet specific public interest criteria to ensure that Canadian buyers have had an opportunity to buy gas on terms and conditions no less favourable than export customers; and that,

• the price of exported gas recovers its share of costs incurred;
• there is reasonable assurance that contracted volumes will be taken; and
• there are adequate arrangements for supply.

The Board must also ensure that any environmental implications of the proposal are considered, which may include the effects from upstream facilities or activity (as established in 1994, where the Supreme Court decision on National Energy Board v. Hydro Quebec ruled that the NEB may consider upstream environmental impacts in its consideration of an application of electricity exports) . However, in order for the Board to consider the environmental effects of upstream projects or activities in its assessment of implications of a gas export, a necessary connection must be found between the proposal to export gas and the project or activities occurring upstream of the international border.

Examples:

• if the gas to be exported across the international boundary could be demonstrated/traced to specific facilities, this may establish a necessary connection between the export authorization decision and upstream environmental impacts (such as contractually dedicated supply to satisfy the export licence). Or,
• where establishment of upstream infrastructure are contingent on the approval of the export licence.

If the Board is satisfied that these criteria are met, it may issue a long-term export licence for a period of up to 25 years. Conditions may also be applied on volume and other factors, as the Board may impose.

Electricity Supply Challenges

On an ongoing basis the Board also collects information from exporters and the marketplace to satisfy itself that conditions of an export licence continue to be met and the natural gas market is functioning effectively.

The market monitoring also serves to assess the current and future supply and demand of energy in Canada and may help to form the basis for any advice or recommendations that the NEB may provide on energy markets and exports which may be requested by the Minister of Natural Resources.

Competition for Natural Gas

Finally, turning to what does this mean to Quebec and to Canada?

If we accept that growth in Canadian and North American supply of natural gas is flat or limited, then the desire to increase gas consumption will mean more competition, with the obvious price implications.

Quebec's neighbor's, the U.S. northeast and Ontario, both project higher natural gas requirements to fuel future power generation demand. For Ontario, growth in natural gas consumption is expected largely to replace existing coal-fired generation.

Potential New Sources of North American Supply

In terms of Gas Supply, there are potential sources of new and incremental gas supply for the North American market. The issues and potential timelines will vary with each, but we all note from headlines and news reports that the industry is responding to current high prices and are actively seeking to develop these other sources of natural gas.

As you all know, we have received and will be examining an application for a northern pipeline proposed to deliver gas from the Mackenzie Delta. Other projects are also being considered, which could bring natural gas from Alaska.

Also companies are looking at developing less conventional sources of natural gas. These could include natural gas from coal in Western Canada and shale gas development in the United States.

Finally, another potential source of incremental gas, judging from recent expansions in the U.S. and the number of proposals and news reports continentally, is the possibility of increasing gas supply through the import of LNG (liquefied natural gas).

LNG Development

Tight gas markets, high prices, the need for relatively quick new supply sources, falling costs of liquefaction and transportation of LNG, and recent regulatory changes in the U.S. are spurring interest in new LNG facilities. There have been up to 50 LNG projects that have been proposed to supply North America with gas. However, observers agree that likely only a few will actually be completed.

While a much larger story in the United States and Mexico, the location of an LNG terminals in Canada are also being considered by several parties. Possible Canadian sites include locations in Quebec (Gros Cacouna and Rabaska), Canaport in New Brunswick, as well as sites in Nova Scotia (Point Tupper and Goldboro) and British Columbia (Kitimat, and Prince Rupert).

For those who expect to be involved with significant increases in natural gas exports, there is a good chance they are likely also thinking of greater natural gas imports, which practically means LNG.

Other Energy Sources

Although fossil fuels such as natural gas will remain important and will continue to supply a significant part of Canada's energy mix in the next decades, no doubt there is also room for adjustment in our use of energy and natural gas. This is true both in terms of improving the technology and efficiency related to the equipment we use for natural gas, but also in implementing and employing technology to enable the use of other sources of energy.

Emerging technologies such as wind, biomass and micro-hydro - while only a small percentage (1.5% of power generation) of Canada's energy demand today, potentially can multiply in use and are projected to provide up to 8% of Canada's power generation requirement by 2025.

In addition, extending the life of other existing fuel supply such as nuclear power, while a small part of the Canadian and Quebec landscape, may also provide an important contribution in balancing our future energy supply and needs.

Natural Gas Export - Issues

Summary of issues related to natural gas exports:

• Supply growth from the WCSB has been showing signs of flattening. While some slight increases are seen in the next couple years, it may not be able to carry the bulk of the incremental growth in markets as it had in previous decades.
• While North American supply is projected by many to be relatively flat, projections for demand are to increase (fueled by economic growth and moves in many regions to use cleaner burning fuels).
• This will mean competition for available supply between consumers and consuming regions. For Quebec, potential significant increases in gas demand for power generation in Ontario and the U.S. northeast will affect prices, volatility and market dynamics in these regions.
• While supply growth has enabled exports to be mostly unconstrained in the past, in a new environment where supply and demand are in a tight balance we will need to closely monitor the markets to continually confirm that they are functioning effectively and appropriately.
• Siting of LNG terminals may face opposition (an issue for a prospective exporter to the extent that natural gas exports must rely on LNG imports.
• Finally, it also tells us that where possible we could also be doing things to improve our regulatory processes and policies.
  • If by doing so, we can avoid unnecessary delays in developing new supply
  • Or it may clarify direction to focus our action in consumption (i.e. towards diversification of fuel or reduction of gas demand vs. something else)

In the example of Quebec, growth in gas consumption in an adjacent domestic or export market in absence of new supply will mean higher competition and prices for gas in this region which will present not only challenges but opportunities.

Natural Gas Export - Opportunities

This new environment also provides us with opportunities:

• While Quebec itself is not a large consumer of natural gas relative to some of our surrounding regions (Ontario and Northeast US), these areas will require more energy and more natural gas and Quebec may be in a position to play an important role in achieving a new balance, both in terms of enabling new gas supply or enabling other forms of energy.
• Quebec being less reliant on natural gas than other places and having a wealth of other energy resources and innovation may also be in a better position to develop other forms of energy.
• Finally, the current prices and environment will encourage development of supply from new areas and less conventional sources. Natural gas from coal, although early in development is projected by many to offset declines in traditional basins. Many of the proponents believe it may be able to do even better than that. New regions or discoveries can still be found. Besides the north, discoveries are also possible in areas closer to existing infrastructure as illustrated by the significant gas find by Shell in West Central Alberta only late last year (estimated 500-800 bcf gas-in-place, with an initial well flow rate of about 30 mmcf/d).
• In all regions, this environment will also encourage us to work harder towards planning and implementing change and innovation to optimize our use of an important resource. All of this will be done in the context of sustainable development, and therefore integrates the economic, social and environmental aspects of decision making.

Conclusion

Contact Us!

I want to close my remarks by thanking you for your attention and providing you with the Board's contact information. I would encourage you to contact us if you would like more information on this or other energy related topics or to access energy market and export statistics.

This contact information includes how you may be able to access a list of our staff and responsibilities, my own e-mail, and our 1-800-number.

I would also be more than happy to answer any questions you may have on today's discussion.

Contact Us!

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Date Modified:

2012-01-11