VANCOUVER — The energy market will never be the same.
The development of technology to extract natural gas and oil from deep underground shale formations in North America is changing the global balance of power on energy issues.
In places such as British Columbia, the abundance of new gas resources is expected to create jobs and revenue through export of liquefied natural gas, or LNG, to Asia. Across Canada, annual gas production is expected to double by 2035 and contribute $940 billion to GDP over that time.
A dozen export facilities have been proposed along the B.C. coast, from Howe Sound to Prince Rupert — with good odds that three or four will proceed to construction.
In jurisdictions such as Oregon, critics including Sierra Club are arguing that North American LNG exports will lead directly to higher domestic prices for gas. That contention is being heard in B.C. as well.
However an increase in the price of natural gas looks inevitable, even without LNG exports, as domestic gas abundance changes North America’s energy profile.
Some big electricity utilities are shifting away from coal because gas is a cheaper heat source for steam power. In the transportation sector, North America’s largest source of greenhouse gas emissions, heavy truck fleets across North America, are being switched from diesel to gas. Demand for gas is also expected to remain strong in powering Alberta’s oilsands sector.
Over the past year, gas has been trading on North American commodity markets below $4 a gigajoule — a 10-year low due to U.S. overproduction. If gas production and demand get into better balance, a price between $4 and $6 per gigajoule looks likely over the next several years according to estimates by FortisBC. At $6, gas is $2 higher than summer 2013 prices in B.C. — but still $1 cheaper than five years ago.
For consumers, home heating is a relative bargain at $6 a gigajoule. Data collected by FortisBC suggests consumers using gas for home heating are in the middle of the pack for energy costs.
At $4 a gigajoule, it’s difficult for most natural gas producers in B.C. and Alberta to make a profit. At $6, they’ll make money.
But, in order for that to happen, it’s clear B.C. producers must look outside North America to do it. B.C. exports 84 per cent of the gas it produces and its natural market, the United States, is disappearing.
“There is literally shale gas everywhere in North America, everywhere from British Columbia which is a world-class resource, to Pennsylvania, New York and Eastern Canada,” said Geoff Morrison, B.C. operations manager for the Canadian Association of Petroleum Producers.
Canadian gas exports to the U.S. have dropped 16 per cent in five years and by 2035, according to the U.S. Energy Information Agency, the decline will reach 62 per cent. Even Canadians are shifting their attention south. Ontario, which Morrison described as “a traditional market for B.C. gas” now gets a third of its supply from the U.S.
“Our biggest and best (and only) customer is now becoming our competitor,” Morrison said. “That’s not a complaint, that’s an observation.
“The need for market diversification for British Columbia and Canadian gas is fundamentally important to the industry. … Not only has the abundance of gas threatened the volume of gas we sell, it’s also having an impact on price.”
When price falls, so does the amount of gas royalty revenue coming to the province, Morrison added.
The International Energy Agency expects overall global demand for energy to increase 40 per cent by 2035.
That demand can only be met if all sources of fuel including renewables and fossil fuel are tapped, Morrison said.
“It’s not an and/or when it comes to renewables and hydrocarbons. If we can encourage those emerging and growing economies, particularly on the Pacific Rim, to choose natural gas over other more intensive hydrocarbons we will do much more for the planet than you might otherwise do.”
Timothy Egan, president and CEO of the Canadian Gas Association expects prices to be “stable” over the next few years. Concern about higher home heating costs as a consequence of LNG exports “is strongest in the United States, for good reason,” he said.
“For a long time, Americans have been very concerned about reliance on energy supplies from less than friendly countries overseas.”
Egan said Canadians aren’t as concerned because “we’ve been exporting natural gas for a very long time.”
“We produce about six TCF, or trillion cubic feet, a year and we export about half of that. If the U.S. market disappears, then we have three TCF that have to go somewhere.”
If B.C. exports gas to Asia, it can maintain production.
Egan does not believe that would hurt B.C.’s domestic gas market.
In Canada “we have a lot more gas than we thought we had. That gives us more room to manoeuvre for those exports and poses less of a threat on price increases,” Egan said.
The pipeline system that moves gas around North America is also expanding — a more efficient transport system supports a lower commodity price for gas in domestic markets.
“A final variable is that we are becoming more efficient in our use of gas. On a per capita basis consumption is dropping. We think the combination of the variables is such that stable pricing in the middle term for natural gas looks very good.”
An efficient North American pipeline system transporting gas around the continent also supports what Egan calls “an incredibly exciting opportunity” to expand the use of gas for transportation including trucking, rail and marine industries.
“Transportation fuels are 45 per cent of the energy mix — overwhelmingly that consumption comes from small vehicles. Nobody in the natural gas industry will tell you we are going to have natural gas available for every homeowner overnight, but everybody is thinking that may be a longer-term opportunity,” Egan said.
Asia’s interest in LNG, centres on electricity generation. Gas generates less carbon dioxide than an equivalent amount of coal, and it’s a much cleaner-burning fuel that won’t cause the same air quality problems.
Japan is the largest potential market for gas, followed by South Korea, according to Yuen Pau Woo, president and CEO of the Asia Pacific Foundation of Canada.
“In the longer term, China is the big prize because while they do not currently use much natural gas they aspire to increase the share of natural gas as a source of energy from two or three per cent to maybe double or three times that number, because they want to wean themselves away from high-polluting coal,” Woo said. “They have relied on coal for a long time only because they had abundant supplies domestically but have realized there is an environmental and health cost that is just not acceptable for the Chinese people.”
Woo said the biggest uncertainty about prospects for North American LNG exports to Asia is “the pricing regime.”
Outside of North America, the pricing formula for natural gas is based on the energy value that would be available in an equivalent amount of oil. The oil-linked formula prices gas at about one-sixth the price of oil.
Within North America, the price of gas is determined at a domestic trading point in Louisiana known as Henry Hub. The Henry Hub gas price is about a third of the oil-linked price, and not surprisingly, Asian buyers are arguing that North American LNG exporters should bill them at the Henry Hub price rather than the oil-linked price.
Many potential North American exporters, meanwhile, are hoping for long-term contracts with Asian buyers at the oil-linked price — which would bring them windfall profits.
There’s a lot at stake for B.C. in this negotiation — the higher the price exporters can fetch, the higher the royalty that B.C. can collect for the provincial treasury.
“Gas pricing is complicated,” Woo said. “It’s more competitive in North America but it’s totally disconnected from global prices because we don’t yet have access for North American gas to international markets.
“The buyers in Asia are only interested in North American gas if they can get a much better deal than they are getting from Qatar and Brunei and Australia and that means moving closer to the Henry Hub price. So some form of compromise will have to be found.”
Asian buyers are motivated to make deals with North American producers, Woo added, because they offer greater certainty in terms of energy security.
“We’ve heard a number of times from the Japanese and Koreans that they have an interest in Canadian natural gas, apart from price factors, because of the stability of the Canadian business and political environment,” Woo said.
“These are massive investments, which is why it is so important that Alberta, B.C. and the federal government have a conducive investment environment for major gas players in Asia — including state-owned enterprises — to invest in these projects not just as a way of providing capital for the infrastructure and for the build-out of these facilities, but also as a way of ensuring that contracts will be in place for these projects to be viable.”