NEB: Canadian gas prices to stay robust through 2006

By OGJ editors
HOUSTON, Oct. 27 -- Canada's National Energy Board expects natural gas prices in Canada to remain high through 2006 and production to change little. The combination means limited growth in natural gas liquids (NGL) supply.

NGL prices therefore will be relatively high over the outlook period, the NEB said in an energy market assessment entitled Short-term Outlook for Natural Gas and Natural Gas Liquids to 2006.

Gas prices are expected to be strongly influenced by benchmark US West Texas Intermediate crude oil prices and probably will fluctuate in the btu-equivalent price range bounded by residual fuel oil (RFO) and No. 2 heating oil.

"Based on expectations that WTI crude oil could average about $50/bbl throughout the outlook period, the historical ratios for No. 2 heating oil and RFO would yield a range of about $6.90/MMbtu to $10.34/MMbtu for natural gas, depending on natural gas fundamentals," the report said.

The US and Canadian gas market is expected to remain supply-constrained throughout 2005-06, and demand is expected to show continued resilience to higher gas prices because of its merits as a clean-burning fuel.

NEB Chairman Kenneth Vollman said, "Consumers should expect natural gas prices to remain high and volatile." He cited the relationship between crude oil and gas prices as well as a tight supply-demand balance, which can be exacerbated by weather.

Canadian gas production has flattened. NEB expects minimal change in average annual Canadian gas deliverability—to 16.87 bcfd by 2006 from 16.71 bcfd in 2004.

Deliverability of conventional gas from Alberta is expected to decline, although the decline could be offset by gains from British Columbia and Saskatchewan.

Meanwhile, Canadian gas demand continues to grow, driven in part by Alberta oil sands operations, NEB said. Oil sands projects used 72 MMcfd in 2004, and the report projects they could consume 1.01 bcfd by the fourth quarter of 2006.

Power generation also is driving gas demand. Ontario is working to remove 7,500 Mw of coal-fired capacity from its power grid by 2009.

"Although the refurbishment of existing nuclear generation might meet part of the requirement for the displaced coal, there will likely be a significant volume of new natural gas-fired power generation entering the system," the report said.

Infrastructure, NGL
NEB said utilization of gas infrastructure in Canada and the US will shift as the nature and location of North American gas supply change. Marginal gas production growth in the US Lower 48 states and Canada will require new sources of gas supply.

Increasing LNG shipments into North America will alter the volume and patterns of gas flows through existing pipeline infrastructure, NEB said.

Limited growth is expected in NGL supply during the outlook period. The economics of NGL extraction is based upon gas prices relative to NGL component prices. High gas prices relative to oil prices discourage NGL extraction.

The increase in oil sands demand for gas reduces the amount of liquids-rich gas available at straddle plants. In Canada, most propane is exported.

"Domestic use for butane has been increasing due to its use as a heavy crude oil diluent, although some volumes continue to be exported," NEB said.

Pentanes-plus supply is tight, and the outlook is for significantly increasing demand for use as diluent for heavy oil and bitumen.

"Of all the NGLs, a major issue lies with a tight ethane supply, since the Canadian petrochemical industry is primarily ethane-based. There are a few possible options to gain access to incremental ethane supply," NEB said.

These options include upgrading existing straddle plants to take a deeper cut of ethane, NEB said. New infrastructure also could be added to extract more liquids from gas streams currently not flowing past straddle plants and from gas streams going to oil sand projects.

"Alternatively, there could also be benefits in modifying and diversifying the petrochemical industry focus away from ethane to other feedstocks such as propane or synthetic gas liquids from upgrader and refinery processes," NEB said. "The optimal choice will depend on the economics and views on the potential for incremental gas supply and changing gas flows in North America."

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