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Home > Speeches and Presentations > Speeches and Presentations 2008 > Regulation of Canadian natural gas: The intersection of supply, infrastructure and the environment

Regulation of Canadian natural gas: The intersection of supply, infrastructure and the environment

Presented by
Gaétan Caron
Chair and Chief Executive Officer
National Energy Board

IGUA / LDC Forum Canada Conference
Toronto, Ontario

24 October 2008

Regulation of Canadian natural gas: The intersection of supply, infrastructure and the environment

It is now broadly recognized, in Canada and elsewhere in the world, that energy and the environment have become inseparable. Demand for energy is expected to grow for the foreseeable future. While the role of technology, renewable energy and conservation will play an ever-increasing role, most forecasters accept that hydrocarbons, including natural gas, will continue to contribute in a major way to the energy mix of nations for a long time. Canada is no exception.

The National Energy Board will celebrate its 50^th anniversary next year. For nearly 50 years, we at the NEB, and the many people who interact with us, have had the privilege of being at the very heart of the energy debate in Canada, in North America and in the world.

I will not venture to predict what will happen in the next 50 years, but I can say with a high degree of confidence that, in the next five to ten years, for the NEB and the participants in its hearings and energy studies, the privilege will continue.

In these brief remarks, I will tell you how I see the intersection of supply, infrastructure and the environment play out in the next several years.

Sustainability

It is often said that letting the market work is consistent with the increasingly integrated nature of world economies, which leads to the prosperity of nations. Promoting economic prosperity must come hand-in-hand with social prosperity and environmental excellence - this is at the heart of sustainable development. The 1992 Earth Summit in Rio de Janeiro provided the forum for integrating these three variables into the concept of sustainability, and the concept is still alive and well in 2008.

In Canada's case, we are privileged as an energy regulator to have, in our mandate, tools for managing several dimensions of sustainable development. With respect to international and interprovincial gas and oil pipelines, for instance, we are responsible for public safety, security, environmental protection, tolls, tariffs and access. Moreover, we are responsible for the entire lifespan of NEB regulated facilities. We are involved even before applications are filed, through pre-application meetings with our regulated companies and public consultation sessions. We hold public hearings for the larger or more contentious applications. When we approve facilities, we attach specific conditions to the certificate of public convenience and necessity, which we monitor ourselves. We have engineers and environmental experts who inspect facilities throughout their lifespan. We audit companies for compliance with our requirements. We also regulate the abandonment of facilities. We are a good example of a one-window approach to regulation.

Connecting the supply to the consumer through infrastructure, in a responsible way, is key to enabling a sustainable future. Energy regulators in Canada and throughout the world are continually adapting to society's expectations in this regard. They are updating their toolbox to effectively prepare for, and respond to:

growing concerns about the impacts of energy infrastructure projects on the land, and on people who live on and off the land
clear expectations on the part of citizens that environmental impacts will be avoided or mitigated, through design choices, or mitigating measures
the desire of citizens to be meaningfully engaged in decision-making processes dealing with energy projects
the imperative of the business community that the regulatory process be clear, well understood and timely

Energy and the Environment

It is for these reasons that more and more people say that energy and the environment are now inseparable. I agree. That's why the NEB is continually updating its tool kit to be current and well equipped to deal with the growing expectations of Canadians.

We have been dealing with environmental matters for a long time. Our original mandate, codified in the original, 1959 version of the National Energy Board Act, already envisaged the integration, into one decision, of all public interest matters that appear to the Board to be relevant. In infrastructure cases that are brought before us, environmental matters have been consistently of relevance for a long time. What is changing, and will continue to change, is not whether we need to care for the environment, but the manner in which we do so.

For about 10 years now, we have moved proactively towards the concept of goal-oriented regulation. This means that we are in the business of stipulating what the goals, the outcomes, the results should be, holding companies who undertake energy projects responsible to meet these results, while leaving the companies the latitude they need to choose the how, so that they may respond more effectively to actual conditions they encounter in the field as they build projects.

World Energy Growth

I said in my introduction that demand for energy is expected to grow for the foreseeable future. This is shown here in this graph based on data from the International Energy Agency. As you can see, the story of this graph is that all forms of energy are expected to grow until at least until 2030. This includes growth in traditional as well as renewable forms of energy. These kinds of predictions indicate that we'll need everything to satisfy the growing energy demand of the world's nations.

Canada's Energy Supply Mix

This graph shows the contribution of natural gas to the total energy supply mix of Canada to 2030. Natural gas contributes an average of 29 percent of Canada's energy supply over the period.

Canadian Natural Gas Supply and Demand

Let us now look at the supply / demand picture for natural gas in Canada. In its shape, the picture resembles that of the U.S., although the proportions vary and the absolute numbers are quite different.

The bottom line is that natural gas consumption is expected to keep growing, and natural gas supply will continue to rely in greater proportion on non-conventional natural gas such as coal bed methane and shale gas, and on frontier gas such as East Coast offshore and the North as represented by the space between the green and pink lines in this chart.

Shale Gas in Canada

We have been talking about non-conventional gas for a while. The story is changing though.

The newest development in the Canadian upstream is that there have been several positive announcements of early exploration results from shale gas plays across Canada. Shale gas represents a potentially huge resource, possibly comparable to the size of Canada's conventional gas reserves. Shales are the source rock for natural gas, but until recently only the gas that migrated out of the shale to more porous rocks was commercially recoverable. With new techniques, the shale rock can be broken up or fractured by using fluid under very high pressure and this can enable gas trapped within the shale to be produced successfully.

These announcements should be regarded with caution due to the very limited exploration results achieved to date. It may be several years before enough drilling and assessment has been completed to determine to what extent Canada's shale gas may be commercially recoverable. In other words, shale gas areas may contain massive amounts of gas in-place, but having sufficient concentration and adequate permeability will be key to commerciality.

The Horn River basin is an emerging play in a remote area just south of the Yukon border. Company announcements suggest the play could have an estimated potential resource of 18 to 28 Tcf. These shales have been described as having a high concentration of natural gas within the rock (estimated at 2.5 times that of the Barnett Shale in the U.S.).

The Montney is not really a pure shale gas play but evolves from tight gas to more shale moving from east to west. While the eastern side of the play has experienced most of the development to date, there is tremendous interest in the tighter and more shaley western side of the play.

A different type of project is the shallow Colorado shale activity in southeast Alberta and southwest Saskatchewan that features fairly low cost wells, commingled production of conventional and shale gas, and low cost access to existing infrastructure.

Testing is also underway in the Utica shale in Quebec and in the Windsor Group shale in the Maritimes.

Deliverability Outlook

North American natural gas prices have been much more volatile than crude oil prices over the last three years. Since last fall, natural gas prices have more than doubled and since July have fallen by almost half.

This degree of price volatility plus the recent challenges in the financial markets creates tremendous uncertainty in the industry.

There is also increased competition for capital from the Bakken oil play in Saskatchewan, other oil developments in Canada, and from companies operating in Canada that are also heavily involved in the major U.S. shale gas plays.

Canada is likely to need at least $9/Mcf ($10 NYMEX) to see a significant rebound in activity.

However, tight gas and shale gas in northeast B.C. is a potential "game-changer" and could possibly offset some declines of traditional gas sources.

Deliverability has been trending down since mid-2006 due to reduced drilling and is currently about 1 Bcf/d below where it was one year ago.

While last year at this time we saw little opportunity for new developments of a sufficient scale to reverse that trend, the positive early results in the B.C. tight gas and shale plays and the degree of enthusiasm expressed through high prices paid at land sales appears to have some potential of eventually slowing or even reversing declines.

Major natural gas projects on the horizon

I attended the World Petroleum Congress in Madrid in June and I was struck by one of the key messages the world heard in Madrid: there is enough energy to meet the world's need for the foreseeable future. The issue is not with supply. The issue is to bring the supply to consumers. This key message was shared among producers, consumers, business, and government from producing and consuming nations.

We see that in North America, notably in Canada. While there is a continuing debate in progress about which energy sources to use, in what proportion, and under what condition, the sharper debates are about infrastructure projects, their necessity and, if they are necessary, where they should be located, under what terms and conditions, and with what environmental and socio-economic impacts.

Although shale gas production in western Canada could turn out to be substantial, conventional gas production is likely to continue to decline and potentially offset shale gas growth to a large extent. Coupled with increased natural gas demand for oil sands in Alberta, additional long haul pipeline capacity out of western Canada may not necessarily be needed unless required by the addition of gas from northern Canada or Alaska. While more long haul pipeline capacity may not necessarily be needed, shale gas production could lead to expansion of pipeline and processing capacity within northeast B.C. and more short haul capacity to access major pipeline systems in B.C. and Alberta.

Mackenzie & Alaska Gas Pipelines

In January 2008, Alaska Governor Sarah Palin announced that a proposal from TransCanada/Foothills Pipelines for the Alaska portion of a pipeline has met the requirements of the Alaska Gas Inducement Act. TransCanada is now preparing for an open season. Meanwhile, I assume that discussions among pipeline interests and Alaska gas producers continue.

In any event, Canada is ready to deal with any filing with respect to a proposed pipeline in Canadian land to carry Alaskan gas to North American markets. NEB staff remains in touch with people potentially interested in regulatory process related to Alaskan gas. Relationships with key players have been built and will continue to be built. We remain ready.

I can't say much about the Mackenzie Gas Project because the proceedings are ongoing. I will simply refer to the Panel's concluding remarks in Yellowknife in September 2007:

We will receive and consider the Joint Review Panel report responsible for the environmental and socio-economic assessment of the project.
We will receive and consider the government's response to that report.
We will hear final argument. We expect to be convening for final argument about 4 months after receipt of the Joint Review Panel report.

Emera Brunswick Pipeline

Meanwhile, in Atlantic Canada, the energy infrastructure continues to evolve.

The Emera Brunswick pipeline, which the NEB approved last year, is about to be open for service. Recently, the NEB granted Repsol Canada a licence to export natural gas, to be received by LNG tankers in Saint-John, New Brunswick, to US markets. Therefore, in the near future, we will have an additional capacity of 500 MMCFDs of natural gas available to transport LNG supplies to Atlantic Canada and US Northeast markets.

Land Matters

I spoke at the beginning of my remarks about:

The growing concerns about the impacts of energy infrastructure projects on the land, and on people who live on and off the land
The clear expectations on the part of citizens that environmental impacts will be avoided or mitigated, through design choices, or mitigating measures; and
The desire of citizens to be meaningfully engaged in decision-making processes dealing with energy projects.

These three drivers motivated us, a year ago, to initiate the Land Matters Consultation Initiative (LMCI). The key areas being considered in the LMCI are:

company interactions with landowners;
improving the accessibility of NEB Processes;
pipeline abandonment - financial issues; and
pipeline abandonment - physical issues.

With respect to the 3^rd area, pipeline abandonment - financial issues, the Board is holding a hearing, RH-2-2008, anticipated to begin on 20 January 2009.

With respect to the other three areas, in the last year, we have held information and consultation about land matters in 25 communities across Canada. We have produced, in consultation with stakeholders, 4 discussion papers about land matters.

We expect that, as a result of the LMCI, we will be in a much better position to deal with land matters throughout the life cycle of regulation, namely, before applications are filed, as part of the regulatory process, during construction, during operation, and when dealing with applications for abandonment.

Environmental matters

The NEB takes a life cycle approach to regulation. We are involved from the pre-application and application stages, through construction and long-term operations, and through the abandonment of the project.

If a project is approved, the NEB ensures the company continues to protect the environment, public health and safety by auditing and inspecting the company's construction activities, maintenance program and monitoring procedures during the operation of the pipeline.

In parallel to the LMCI, we have also entered into an agreement with the Pembina Institute to reach out to Canada's environmental non-governmental organizations. We have spoken with 10 of Canada's most active and influential environmental advocates and in the coming months, plan to meet with the leaders of these organizations to discuss better ways of protecting the environment during pipeline construction and operation. Our goal is to help persons with environmental interests to see in the NEB regulatory process a credible and trusted place for environmental discussions and debates to take place in respect of NEB-regulated facilities.

Public Engagement

More generally, the Board is committed to continually improve its processes so that Canadian citizens believe that they may meaningfully participate in the Board's regulatory proceedings dealing with energy projects.

The fourth goal in our strategic plan is:

The NEB fulfills its mandate with the benefit of effective public engagement.

In concrete terms, this means that, every time we engage Canadians, we look for the best means, according to them, of being effectively engaged. Our staff is particularly gifted in this regard, and I constantly receive unsolicited kudos thanking us for the great assistance they have received from the 350 people who work at the Board.

I cannot help but mention that, on October 2^nd, Maclean's magazine recognized the NEB as one of Canada's Top 100 employers. This was earned because we have top employees dedicating their entire career to the pursuit of the public interest.

Service Standards (sample)

I mentioned at the beginning the importance to Canadians that the regulatory process be clear, well understood and timely.

There are two key initiatives I would like to mention in that regard.

First, informing Canadians of the time it takes to process applications is part of our commitment to transparency and regulatory efficiency. Every year, we publish our service standards, and we inform Canadians of our performance under these service standards. These are our latest published performance results relative to our service standards for a range of tasks.

Regulatory Improvement

The second broad area of improvements relate to our interactions with other government processes, notably the environmental assessment process. In that respect, we actively support and we are contributing to the following government-wide initiatives:

The Major Project Management Office announced by the Federal Government in Budget 2007, and launched concretely by Minister Lunn on October 1st, 2007 - the MPMO is now in operation and has most of its tools ready for action
the Northern Regulatory Improvement Initiative launched by Minister Strahl of Indian and Northern Affairs Canada on November 7^th, 2007
The regulatory improvement work carried out under the auspices of the Conference of Energy and Mines Ministers, with the goal of sharing best practices among federal, provincial, and territorial regulators throughout Canada. The NEB works through our association of regulators, CAMPUT, in this area.

"It's getting better all the time"

Those of you who attended the Annual Conference of the Canadian Association of Members of Public Utilities Tribunals (CAMPUT) in Banff in April of this year will recall that the theme song of the event was ”It's getting better all the time”. The key message in this choice of theme song is that the regulatory regime is not static, it is very dynamic. As we continue to be at the interaction of supply, infrastructure and the environment, regulators in Canada and around the world will need to continually update their tool kits, be creative, be extremely good listeners, be partners, be committed to continual improvement., and be passionate about the pursuit of the public interest. The NEB and the entire regulatory community in Canada is, in my view, up to this challenge.

If you are interested in knowing more about the topics I discussed today, you can talk to me, or: