Market forces are working for the North American natural gas industry, but major changes are needed to reduce price spikes and ensure year-round supply, says a senior industry executive.
Tim Bullock, president, BP Gas & Power, North America, made the comments last month to a Canadian Energy Research Institute conference.
BP view
Bullock said that issues facing the US industry include the need for infrastructure investment in pipelines, regulatory uncertainty, public loss of trust, and financial restraints. He said price spikes, which are likely to continue, do work eventually in the interests of supply-demand balance.
Bullock said more supply is needed over the whole year, and the challenge for producers is to be efficient and develop reserves that will provide security of supply.
The BP executive also called for:
- Efforts to make the approval process for new pipelines as short as possible.
- Initiatives to rebuild public confidence in the industry. He noted that trust has been damaged as a result of industry scandals, and recent polls indicate that 84% of the public do not trust "the industry in which we work."
- Improved mechanisms for customers to work with suppliers: "There should be increased dialogue between industry and regulators to ensure that each understands the other's needs."
- More flexibility in storage capacity for faster response to market demand and expanded pipeline capacity, which would help to reduce price volatility. "It is in the overall interest of the gas market to have as many participants as possible and as much liquidity as possible," he said.
- Improvements in reporting and transparency in gas pricing.
Infrastructure concerns
Bullock said there is a need for expansion of pipeline systems, because not all gas supply is located in the right place, and more infrastructure is needed to get gas to markets.
The BP executive said he is also a believer in expanding LNG access to the US from offshore sites. He said LNG supplies can be drawn in from anywhere in the world, and there is a bigger gas supply pool to draw from than relying only on North American sources.
Oil sands concerns
Neil Camarta, senior vice-president, oil sands, for Shell Canada Ltd., told the conference that natural gas prices are "hard-wired" to supply costs and a huge factor in oil sands economics.
Camarta said every $1 increase in the price of gas adds 60¢/bbl to the oil sands supply price of $10-12/bbl. Shell and partners recently completed a $7 billion (Can.), 155,000 b/d oil sands mining, pipeline, and upgrader project in Alberta.
The Shell executive said there is 300 billion bbl of recoverable oil in Canadian oil sands, but $60 billion in planned and proposed development is not a given. Camarta said risks facing oil sands developers, in addition to gas prices, include capital costs, labor supply, oil prices, and the possible impact of Canada's ratification of the Kyoto Protocol on Climate Change.
He said that if developments proceed, the oil sands resource could provide up to 25% of North American oil needs, reduce imports, and supply more than half of Canadian oil production.
He said cogeneration plants supply much of the power for oil sands and upgrader operations, and their gas requirements could double within the decade.
Camarta said the worst-case scenario for oil sands developers would be a sharp drop in oil prices with gas prices remaining high. That, he said, would give some "wannabe" oil sands developers second thoughts.
The Shell executive said developers planning oil sands projects are not likely to be influenced by short-term developments in the Middle East. He said major oil sands projects require a long-term view on pricing and other issues.