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Home > Speeches and Presentations > Speeches and Presentations 2008 > Canada's Energy Future: The Natural Gas Story

Canada's Energy Future: The Natural Gas Story

Presented by
Jim Davidson
Team Leader, Gas, Commodities Business Unit
National Energy Board

Annual Convention of the AAPG
San Antonio, Texas

21 April 2008

Canada's Energy Future: The Natural Gas Story

Good afternoon, everyone and thank you for having me with you today.

The North American gas market is constantly changing which makes it difficult to make long-term projections.

In spite of that difficulty, the NEB examines a wide range of possibilities for Canadian gas supply, demand and prices and regularly publishes a report called Canada's Energy Future: Reference Case and Scenarios to 2030.

Outline

This is the outline I will be following in my presentation today.

The National Energy Board

I thought that I should start with a brief overview of the National Energy Board, since many of you may not be familiar with it. It has many similar functions as the Federal Energy Regulatory Commission in the U.S.

We do our work through a relatively modest organization, in terms of overall size. There are about 340 people working at the Board. Our budget is approximately $US 40 million. We have only one office, located in Calgary, Alberta (most other national institutions are located in the national capital, Ottawa, Ontario). We travel a lot throughout the country for hearings and meetings with the people of Canada. Our staff have expertise in a wide range of fields, given our broad mandate: engineers, environmental specialists, economists, market analysts, financial specialists, lawyers, and many others.

We are independent in that we report to Parliament, through the Minister of Natural Resources Canada. Our decisions are based on a public record, and our hearings rigorously follow the principles of natural justice, which includes transparency and procedural fairness.

We obtain our budget from Parliament. Our costs are recovered from industry, and the money collected returns to government. These costs are typically recovered by pipeline companies and energy exporters in their tolls. Therefore, the citizen does not pay for the NEB, except as a user of energy facilities.

The NEB's role pursuant to the National Energy Board Act

Our regulatory functions are shown on the slide. Our mandate also requires that we monitor the outlook of energy supply and demand in Canadian markets and provide Canadians with energy information. The Energy Future report which I will be discussing today is our flagship report in the monitoring area. In various forms it has been published on a regular basis, every two to five years. The first one was published in 1967.

About the Report

The most recent report, published in November 2007, is a comprehensive energy supply and demand outlook for 2005 to 2030. The current edition, consists of a reference case analysis from 2005-2015 and an analysis of three scenarios, which extend to 2030.

The key objectives of the report are shown.

It is important to underline the amount of consultation that went into the development of this report. We consulted with over 250 energy experts and held two cross-Canada consultations tours with representatives from industry, provincial and federal governments, academia, NGOs, First Nations and interested Canadians. Much of this information is available on the Board's website.

With this information and our own analysis and understanding, we use a series of economic and geological models to develop quantitative projections of energy supply and demand in Canada.

Reference Case and Scenarios

In order to understand our results, it is important to have an appreciation of the assumptions in terms of the energy prices and economic conditions which underlie the reference case and each of the scenarios.

The Reference Case is our best guess about the development of supply and demand in Canada based upon current decisions and policies and current economic and energy trends. It is characterized by moderate energy prices and business as usual developments. For example, natural gas prices are assumed to follow a traditional relationship with crude oil. (84% of the 6:1 Btu parity)

The scenarios are intended to address uncertainty such as world geopolitical and economic factors, social trends, future policy decisions, or technology developments. Each scenario is based upon a set of internally consistent assumptions, designed to test our findings. We see each scenario as plausible and don't attach a probability to any of the scenarios.

Continuing trends extends the trends used in the reference case out another 15 years to 2030.

Triple E scenario assumes fairly aggressive conservation goals pursued on a global level. The scenario has more moderate economic growth as a result of economic/environmental trade-offs. There is a preference given to greener fuels such as renewables, nuclear and natural gas and some form of carbon pricing is assumed. By 2030, this scenario has the lowest energy prices from a producer perspective. This is achieved through a cooperative global environment resulting from abundant energy supplies around the world, as well as comprehensive energy demand management programs, which slow energy demand growth.

The Fortified Islands scenario focuses on North American energy security. It has the slowest economic growth and highest energy prices. These outcomes are a result of a security conscious world, where continued geopolitical tensions limit access to global energy supplies. The emphasis is on developing indigenous energy sources.

Again, these scenario storylines were developed through extensive discussion with energy experts both at NEB and outside. These were further refined during the cross-Canada consultation tours.

Crude Oil and Natural Gas Prices

Energy prices are higher than they have been historically across all scenarios.

Given that five years ago, the price of oil was US$26 per barrel, and is currently trading in the US$100 range, it is obvious that making any long-term predictions on energy prices is challenging. Nonetheless we had to make some assumptions on annual average prices for our modeling work.

In two of the scenarios there will be a decline in price compared to what Canadians are currently paying. This takes place in both the Triple E and Continuing Trends scenarios. In the Fortified Islands scenario, Canadians could expect to pay more for energy than what they are paying today.

Following the general convention and reflecting the fact that energy prices are set in the global market, the prices are specified in US dollars.

Resource Utilization

Canada still has a large resource base of natural gas (dark columns) remaining under any of our 3 scenarios. The amount of resource that would be produced between 2005 and 2030 under each scenario is shown adjacent to these columns.

Over this time frame, production continues to draw heavily from conventional resources in Western Canada and unconventional gas resources.

Coal bed methane (CBM) has an increasing role, especially at high prices, but other unconventional and frontier resources are challenged by uncertainty and the lengthy time restraints and high costs for the infrastructure needed to connect to their remote locations.

As a result, Canadian gas production declines in two of our three scenarios. At the same time, all scenarios call for growth in Canadian gas demand. One of the key areas of demand growth is to fuel oil sands operations.

Canadian Gas Production

In the Reference Case, gas production is relatively flat though 2010 when it begins to gradually decline. Coal bed methane (CBM) production is assumed to reach 2 billion cubic feet per day by 2015.

On the frontier, the Deep Panuke Project, offshore Nova Scotia, is assumed to start production in 2010, with the proposed Mackenzie Gas Project assumed to begin production in 2014.

In the Continuing Trends scenario, gas production continues to decline in Western Canada. Domestic gas supply gradually declines by almost half over this period.

In the Triple E scenario, abundant LNG imports drive gas prices down. Domestic gas production slows as some of the higher cost conventional and unconventional resources become uneconomic to produce.

In the Fortified Islands scenario, higher prices enable strong Canadian gas development and there is extensive development of unconventional and frontier sources.

WCSB Conventional and Unconventional

Conventional gas from Western Canada is still the largest component of supply, but is in decline in all scenarios. There remains a large amount of conventional resources (134 trillion cubic feet). But on average, new conventional gas wells are less productive than those discovered previously, so producers get less output for the same amount of drilling efforts and costs.

Western Canada unconventional gas includes coal bed methane (CBM), tight gas and shale gas. CBM production peaks at 1.6 billion cubic feet per day in the Continuing Trends and Triple E scenarios and 3.5 billion cubic feet per day in the Fortified Islands scenario (2020).

Tight gas represents just over 10 per cent of total production.

Shale gas represents about 1 per cent of production in the Continuing Trends and Triple E scenarios. It does better in the Fortified Islands scenario where it accounts for about 4 per cent. At the time the report was being prepared, there was very little public information available on shale gas plays in Canada. Since then there have been a number of announcements from work in British Columbia, Alberta and Quebec, which could increase the expected contribution from shale gas.

Frontier, Northern and LNG Imports

Through 2013, frontier production comes from the east coast only.

Mackenzie gas is assumed to become available in 2014 in the Continuing Trends and Fortified Islands scenarios. Whether this will actually happen is subject to the regulatory process that is currently underway, timing and corporate decisions.

By 2017, oil production from the existing projects off Newfoundland is complete and the associated gas resources are utilized.

In the Fortified Islands scenario we include gas resources from offshore Labrador and the Western Arctic Islands.

LNG projects in Atlantic Canada, Quebec and British Columbia are at various stages of consideration. LNG imports begin in 2009 and three terminals are assumed to be operational by 2015. In Continuing Trends, a fourth terminal is added and utilization rises to stabilize at just over 2 billion cubic feet per day.

In the Triple E scenario, natural gas imports are more than double levels in the Continuing Trends scenario. By 2021 we assume seven operating terminals and LNG imports would be almost equal to Canadian domestic gas production by 2030.

In the Fortified Islands scenario, an unstable international investment climate and reduced international trade require North America to be self-sufficient in terms of gas supply, with only minor amounts of LNG imports (none entering through Canada after 2015).

Canadian Gas Demand

Canadian gas demand increases steadily through 2015 largely due to increasing gas use for oil sands and electricity generation.

North American gas markets have proven to be resilient at the $7 pricing level expected in the Reference Case and Continuing Trends scenarios. Ongoing conservation and gradual technology improvements would assist energy consumers, although technological breakthroughs are considered unlikely over this time period. Only a limited number of oil sands projects are expected to use alternative fuels before 2015. The growth of LNG trade is likely to reduce pricing differentials between different sources of gas around the world.

In the Continuing Trends scenario, gas demand is the highest of the three scenarios due to continued strong economic growth and relatively affordable energy prices.

In the Triple E scenario, lower energy prices encourage more demand than in the Fortified Islands scenario, but the positive investment climate and high environmental standards encourages outsourcing of energy intensive industries. Over the 2016 to 2030 period, Canadian gas demand is projected to increase by 2.4 billion cubic feet per day, or only two-thirds of the increase in the Continuing Trends scenario.

In the Fortified Islands scenario, gas demand is the lowest of the three cases as high energy prices encourage conservation and slower economic growth reduces energy requirements. Reduced oil sands development requires less fuel. Domestic gas demand grows by only 1.5 billion cubic feet per day over the period.

Canadian Net Gas Exports

With Canadian gas demand increasing in all cases, and flat to declining Canadian production in the Reference, Continuing Trends and Triple E scenarios, there is a significant tightening of the supply-demand balance

The difference between domestic supply and demand is indicated here as potential net gas exports. Any reduction in net gas exports out of Canada is expected to be offset by increased imports of LNG into the U.S.

In the Fortified Islands scenario, net gas exports are above current levels for most of the period.

The result of the Continuing Trends scenario is similar to the 2003 Energy Future report's Supply Push scenario, and the Fortified Islands scenario result is similar to the Techno-Vert case from the last report.

Natural Gas Wild Cards - Supply Related

The Energy Future analysis exposed a number of key issues and uncertainties in natural gas markets – we are calling these the "wild cards".

Subsequent to the analysis in the Energy Future project, industry sentiment regarding gas drilling in western Canada, and Alberta in particular, turned considerably more negative. Industry concerns over cost escalation, softening gas prices, better oil economics, and changes to Alberta's royalties have caused investments in gas developments to be scaled back. How long this might persist and the impact on Canadian production declines is unknown.

Since mid-2007, global LNG has been in relatively short supply with Asian and European markets readily outbidding North America for spare cargoes during peak demand periods. Based on the new projects expected to enter service between 2008 and 2010, LNG supply could surge by almost 50 per cent. A significant increment of that could come to North America especially during the summer months. However, LNG supplies are subject to international market conditions which determine where the gas will go at the time of delivery.

Pipeline projects to access gas in the Mackenzie Delta and Alaska have been around for decades. Recently TransCanada Pipelines was selected under Alaska's Gas Inducement Act to proceed to an open season and receive some financial backing for the regulatory process. BP and ConocoPhillips have since announced a separate proposal to ship Alaska gas to markets through Western Canada. How these might impact the Mackenzie Gas Pipeline Project remains to be seen.

Natural Gas Wild Cards - Demand Related

On the demand side, there is considerable uncertainty regarding the key oil sands market. Roughly ¾ of the resource is too deep to surface mine and instead the resource must be heated underground to allow the bitumen to flow to horizontal wells. Although more energy intensive, there is also the possibility of substituting alternative fuels with a number of different technologies being evaluated.

Finally, gas-fired power. There are few alternatives to the operational flexibility, ease of siting, rapid construction, and low initial capital costs associated with gas-fired facilities. This is particularly the case if the power grid requires that a backup source of power be situated close to a remote wind facility. Clean coal may yet supplant future incremental gas additions, but uncertain costs for new technology and future emissions have slowed its development.

Next Steps

Looking ahead, we have identified a number of topics that we will research further and issue separate reports over the next few years.

The Reference Case may be updated approximately every two years, depending on the Board's decision.

Some of the future work we expect to do will be in the area of resource assessments for different regions in Canada.

All of this work will be both advertised in advance and published, when ready, on the Board's website, where everything can be obtained at no charge.