Canadian Association of Petroleum Producers
Unconventional petroleum sources, such as synthetic crude from oilsands, will account for a growing share of Canada's oil production in the next century. This aerial photograph of Syncrude Canada Ltd.'s oilsands processing complex near Fort McMurray, Alta., shows the Base Mine in the foreground. Photo courtesy of Syncrude Canada.Recent and continuing expansions to the Canadian pipeline infrastructure have put the Western Canada Sedimentary Basin (WCSB) on the verge of full integration with the North American natural gas market.
This development has Canadian producers well-positioned to respond to new and growing markets in the U.S. While the pipeline expansions have removed a traditional constraint to deliverability, higher production demands are also being placed on the WCSB as Canada's oil and gas industry plans to meet the potential growth in demand from U.S. markets, particularly in the Midwest and Northeast regions.
Assessing the Canadian industry's ability to meet future North American energy needs requires a close look at the state of Canada's resource supply, the projected growth in domestic and U.S. markets, and the development and capacity of transmission systems.
Canada's resource baseCanada's immense hydrocarbon resource base represents a reliable supply source of natural gas and crude oil for both domestic and U.S. export markets.
The bulk of this resource base is concentrated primarily in the WCSB, which extends from the province of British Columbia on Canada's west coast eastward through the provinces of Alberta, Saskatchewan, and Manitoba and includes portions of the Northwest and Yukon territories.
Canada also has relatively unexplored arctic and offshore basins that show excellent future geological potential, with the East Coast offshore basins already producing crude oil and expecting natural gas production by late 1999. Canada's producing and potential supply basins are shown in Fig. 1 [84,415 bytes].
Much of Canada's natural gas reserves are yet to be developed. Ultimate remaining potential resources are estimated at 617 tcf, compared with 1998 domestic demand (2.7 tcf) and U.S. exports (3.1 tcf). As in the U.S., the sustainability of Canada's natural gas supplies has been periodically questioned, yet advances in technology have improved industry's ability to find and develop gas reserves more cost-effectively. Innovations such as 3D seismic surveys, horizontal drilling, and improved drill bit technology continue to tap resources previously thought uneconomic, so the resource base is actually growing rather than stagnating or declining.
Technology advancesTechnological advances have contributed to a doubling of the western Canadian resource base in the last 20 years, and they are a prime factor in determining whether the WCSB can meet the growing demand of U.S. markets.
The Canadian Association of Petroleum Producers (CAPP) member companies produce about 95% of Canada's natural gas and crude oil. These producers are actively employing improved technology for resource development and are positioning Canada as a global leader of innovation for industry. This leadership will help ensure a reliable resource supply for all markets and solutions to exploration and development challenges around the world. CAPP and its member companies are committed to maintaining the sustainability and economic well-being of Canada's resource basins in an environmentally, socially, and technologically responsible manner.
Technology has also played a key role in making Canadian producers some of the most progressive environmental stewards of industry. Environmental standards for Canadian industry are among the highest in the world, a result of both careful planning and cooperation with government, environment, and public stakeholders. This approach has encouraged sustainable development, energy efficiencies, and economic growth. It is also a reflection of industry's position on climate change as Canada continues to work on viable solutions to concerns over greenhouse gas emissions while encouraging economic progress. Technological innovations such as horizontal drilling allow exploration and development in environmentally sensitive areas, leaving a much smaller footprint on the land while bringing valuable natural resources to the surface. Advances in reclamation technology also let companies restore the exploration and production sites to their natural state, bringing the full life cycle of wells into a responsible resource management framework.
Competitive advantagesIn addition to having substantial resources available for domestic and U.S. consumption, several key factors serve to assure U.S. consumers of an uninterrupted and competitive supply of natural gas from Canada.
These include: political and regulatory stability through Canada's commitment to free and open energy markets, the evolution of a market-priced economy (with the opportunities and obligations of the North America Free Trade Agreement), and the relatively low cost of production in the WCSB.
This last factor reflects the relative immaturity of the WCSB in the North American context that gives the WCSB a distinct cost advantage over most U.S. supply sources. Cumulative production accounts for about 37% of the resource base in the U.S., while it accounts for only 15% of the resource base estimated for Canada.
While Canadian gas often has to be transported over greater distances than U.S.-sourced gas to serve U.S. markets, the lower production costs experienced in the WCSB makes Canadian gas a competitive option in the targeted regions.
Gas pipeline infrastructureTransCanada Pipelines Ltd. (TCPL), with about 7.3 bcfd of total deliveries of western Canadian gas (of which 3.8 bcfd is delivered to U.S. Midwest and East markets) dominates the pipeline infrastructure in Canada ( Fig. 2 [167,875 bytes]).
Another 2.2 bcfd of gas is exported to midwestern U.S. markets via Foothills Pipelines, while western U.S. markets receive 2.5 bcfd of gas via the Alberta Natural Gas (ANG) Pipeline and 1 bcfd from the Westcoast system.
Most of these export pipelines have undergone significant expansions in the 1990s to accommodate U.S. markets' voracious appetite for Canadian gas. Exports of Canadian gas to the U.S. have grown to about 3.1 tcf in 1998 from only 1.7 tcf in 1990. These volumes will grow even more with the recently completed expansion of Foot- hills/Northern Border by 700 MMcfd and the completion of the impending Alliance Pipeline project in late 2000, with an initial delivery capacity of 1.3 bcfd. Alliance has received full regulatory approval in both the U.S. and Canada and has recently commenced construction of its pipelines.
Announced in late 1996, the Alliance project is a high-pressure pipeline that has the ability to receive liquids-rich gas and offers producers an alternative transportation route to U.S. markets. It is essentially a "bullet-line concept" pipeline, receiving gas in northeastern British Columbia and Alberta and transporting the gas directly to the growing Chicago hub. Once the gas is delivered in Chicago, the gas can be consumed locally or can be transported to other markets on pipelines connected to the Chicago hub.
There are numerous pipeline projects currently before the Federal Energy Regulatory Commission (FERC) that propose to transport gas from the Chicago hub to markets in the U.S. Northeast. Two projects, Vector Pipeline and Tristate Pipeline, are competing proposals to take gas from Chicago back into Canada to serve southern Ontario before delivering volumes to the U.S. Northeast via the proposed Millenium Pipeline project. The Vector proposal has a proposed in-service date of November 2000 to deliver 1 bcfd of gas, has received regulatory approval in Canada, and is awaiting its final approval by the FERC. Tristate has yet to obtain regulatory approval in either Canada or the U.S. The Millenium project also proposes a November 2000 in-service date with the ability to transport about 700 MMcfd to U.S. Northeast markets. Millenium is also awaiting final approval by FERC.
In addition to new pipelines transporting Western Canada gas to U.S. Midwest and Northeast markets, the Maritimes & Northeast Pipeline Project is currently being constructed to transport about 360 MMcfd of Sable Island gas off Canada's eastern coast to serve U.S. Northeast markets.
These proposed additions to the pipeline infrastructure result in increased access for Canadian producers to U.S. markets, signifying that Canadian gas is well positioned, along with the U.S. supply basins, to meet the anticipated growth in U.S. gas needs.
Demand for Canadian gasFor most of the current decade, pipeline bottlenecks constrained the development of Canadian natural gas exports, keeping commodity prices low and suppressing gas drilling.
The 1985 Western Accord resulted in the deregulation of natural gas prices in Canada and the introduction of open access, nondiscriminatory services on pipelines. It also started the unbundling of services, leaving only transportation services with the regulated pipelines and enabling end users to purchase natural gas direct from their suppliers of choice. The natural gas market has flourished in both the U.S. and Canada over this period and has evolved into a highly competitive continental market.
In late 1998, expansions to the Northern Border and TransCanada pipelines alleviated this constraint and eliminated Canada's disconnect from the North American market. The expansions added an additional 1.1 bcfd of transportation capacity out of the WCSB in addition to the 1.3 bcfd coming on stream from the Alliance pipeline. This additional capacity will come on stream just as growing U.S. natural gas markets will be looking for additional sources of supply.
The U.S. Energy Information Administration recently completed its latest Annual Energy Outlook, which contains forecasts of U.S. gas demand to 2020. U.S. Northeast and Midwest regions are the primary destination of numerous pipeline projects and are thus the Canadian focus of these demand forecasts. Gas demand in the U.S. Northeast is expected to grow by an average of 2.1 %/year during 1997-2020, increasing to 5.3 quads from 3.2 quadrillion BTU (quads). For the U.S. Midwest during the same period, gas demand is forecast to grow at an average of 1.32%/year, increasing to 7.2 quads from 5.3.
The U.S. Northeast's gas demand growth is dominated by projected growth in electric power generation demand; if this does not materialize as anticipated, then gas demand growth in this region will be relatively flat. The same scenario exists for the U.S. Midwest region, where electric power is currently generated primarily by burning coal. Natural gas is expected penetrate this market as electricity producers look for cleaner-burning fuel in response to climate change concerns.
Canadian pipeline expansions also increase the WCSB's ability to serve the eastern Canadian markets of Ontario and Quebec. The Canadian Gas Association (CGA) forecasts the Ontario natural gas market will grow to almost 1.5 tcf in 2010 from 1.2 tcf in 1998, representing an annual growth rate of 1.77%. Again, the main driver of this projected growth is electric power generation. The net effect of deregulation in the Canadian energy market is influenced by the process of restructuring currently under way in the electricity sector. CGA forecasts for the Quebec market show an insignificant growth to 0.28 tcf from 0.23 tcf in 1998 in 2010, reflecting the anticipation that gas will not make any real penetration into the electricity generation market there.
While markets traditionally secured by western Canadian gas are expected to grow, the real question is whether there will be enough export supply and pipeline capacity to meet this demand. In a recent pipeline utilization study, CAPP examined three independent forecasts of WCSB gas production: the National Energy Board (NEB) forecast in a preliminary release of its Supply and Demand Report to 2025; a production forecast by a Sproule Associates Ltd. accompanying TCPL's 1998 facility application to the NEB; and an Oil and Gas Exploration and Extraction Estimation Model (Ogeee) production forecast, mid-price case, developed by CCH Consulting, Economics, & Regulatory Services, Calgary. For each of these forecasts, CGA's forecast of gas demand in British Columbia, Alberta, and Saskatchewan were subtracted to determine what volumes of gas would be available from the WCSB after local demand had been served. The remaining volumes were then compared with a forecast of the pipeline capacity leaving the WCSB during 2000-10 (Fig. 3 [74,759 bytes]).
In the Sproule and Ogeee forecasts, there would be more than enough gas left over for the entire forecast period to fill the pipelines moving gas from the WCSB. The NEB forecast, however, shows that production slightly lags pipeline capacity until 2004, when production will fill and surpass pipeline capacity through 2010. The comparison of WCSB supply forecasts and pipeline capacity generally suggests that export pipelines can maintain high levels of throughput during the forecast period.
Gas transportation pricesThe competitiveness of the WCSB as a whole is critical when considering regional gas prices and the associated prices to Canadian producers. As previously noted, the North American natural gas market has become increasingly integrated and highly competitive. The forces of competition have in recent years led to a reexamination of the way gas transportation is priced in Alberta on the Nova Gas Transmission Ltd. (NGTL) system, which is now called the TransCanada Transmission-Alberta System (Tctas), following the June 1998 merger of Nova and Trans Canada Pipelines. Tctas transported about 4.5 tcf of gas in 1998, which accounted for about 95% of the production in Alberta. Since 1980, a postage-stamp pricing structure has been in place on what is now Tctas. This structure subjects gas produced in the far north of the province to the same toll for taking gas out of Alberta as gas produced in the south of the province that is much closer to the provincial export points. Currently, the rate is about 27¢ (Canadian)/Mcf. Southern Alberta producers protested loudly against the continuation of this pricing structure and pursued a number of by-pass pipeline alternatives that would have resulted in significant toll increases for remaining NGTL shippers. This dissention among the producing community generated much uncertainty that potentially threatened the orderly development of the basin.
In an effort to stem this growing uncertainty, CAPP and Tctas negotiated a new tolling structure over a 2-year period that will see exporters pay a transportation price ranging from 19¢ to 35¢/Mcf, depending in part on the distance gas would travel on the Tctas system. The agreement has the support of CAPP's members and requires the approval of the Alberta Energy Utilities Board (AEUB) before it can become effective. A decision from the AEUB is anticipated before yearend. The agreement will result in greater toll certainty, creating a climate that would encourage continued investment to develop the gas resources of the basin for both domestic and export markets.
Canadian crude oil reservesThere are also abundant reserves of conventional and nonconventional crude oil in Canada, with estimated remaining proven reserves of 9.4 billion bbl. To the end of 1997, Canada has produced 17.5 billion bbl of conventional oil from an estimated ultimate potential resource of 57 billion bbl.
The majority of conventional production comes from the WCSB, although the Hibernia project off Canada's eastern coast has been producing since late 1997 and is expected to produce at a rate of about 135,000 b/d at full production. The Cohasset-Panuke project off Nova Scotia has been producing since 1992 and averages about 17,000 b/d of light crude.
Large volumes of nonconventional resources also exist. About 300 billion bbl of crude could be potentially recovered by extracting bitumen, a tar-like substance, from sand deposits. Developing these resources entails a range of technologies and production processes, and they are generally more costly to develop than conventional oil resources. Nevertheless, the Canadian industry has been very successful at reducing the cost of developing these valuable resources and has become a pioneer in oilsands production technology. Proposed new projects and expansions to oilsands operations are estimated to cost $19 billion.
In 1998, Canada produced about 2.2 million b/d of crude oil, including conventional light and heavy, synthetic, bitumen, and pentanes-plus. About 14 % of total production (about 300,000 b/d) comprises synthetic crude produced from large integrated mining operations in Alberta's oilsands areas. Growing production from these nonconventional resources is becoming a major component of Canada's overall crude oil production.
Some of the lowest prices in 25 years suppressed crude oil drilling and production activity during most of 1998, although crude oil prices have recovered in first half 1999. The recovery of WCSB production is forecast to return to 1998 levels by about 2000-01, after which the forecast points to continued growth in crude supplies during 2000-10 (Fig. 5 [60,345 bytes]). Although total WCSB production will be reduced somewhat, expansions to the pipeline infrastructure are actually increasing deliveries to U.S. markets during 1999.
Expansions to crude oil pipelinesSeveral oil pipeline expansions are currently scheduled to increase WCSB exports to U.S. and eastern Canadian markets. Enbridge Pipelines Inc. is Canada's principal crude oil transmission system that, in conjunction with Lakehead Pipe Line Inc., transports oil through 7,600 miles of pipeline along the mainline between Edmonton and Montreal ( Fig. 4 [161,621 bytes]). Enbridge's current expansion projects include the System Expansion Project Phase II (SEP II), Line 14; and the Terrace Expansion Program, Phase I. The new 24-in. Line 14 is the final phase of the SEP II expansion and will allow upwards of 170,000 b/d of added takeaway capacity from Superior to Chicago as part of the Lakehead Pipe Line System. Linefill for this expansion is estimated at 1.3 million bbl.
The three-phase Terrace Expansion Program will provide an overall system capacity increase of 350,000 b/d of heavy crude. Phase I consists of roughly 500 miles of 36-in. pipeline between Kerrobert, Sask., and Clearbrook, Minn., representing an additional 95,000 b/d of incremental capacity. By September 1999, with all pumps installed, total Phase I incremental capacity will be 167,000 b/d. Phase I linefill is estimated at 2.5 million bbl for Enbridge and 0.6 million bbl for the Lakehead portion of the expansion. In-service for Phase I began in April 1999 with pending in-service for Phase II and Phase III expected in the next 2-3 years.
This increase in capacity helps Canadian producers to increase exports to U.S. markets to help offset any decline in U.S. production. The proximity of Canadian resource basins provides a strategic advantage over more distant resources that are shipped to the U.S. from overseas, making Canadian crude oil a competitive and secure supply for U.S. import demands.
Outlook for exportsBased on projected crude oil and natural gas production levels for the next decade, Canada is expected to maintain its position as a net exporter of crude oil, natural gas, and natural gas liquids.
The expanding development of basins in both western Canada and the East Coast offshore represents an enormous resource potential for both domestic and export energy needs for many years to come. Improved technology is at once expanding the potential of existing basins, reducing the costs of development and reducing the impact of industry's activities on the environment in a responsible manner.
Key to the success of Canada's producing industry, of course, is the development of an effective and competitive pipeline infrastructure to reach both domestic and export markets. The recent and proposed oil and gas pipeline expansions outlined in this article demonstrate the working relationship between Canadian producers and pipeline companies that have a common goal in keeping Canada's resource basins competitive and ready to capitalize on market opportunities. These expansions have also helped to integrate the WCSB with the North American market and have removed some of the key constraints to developing Canada's enormous hydrocarbon resources, thereby allowing Canada's petroleum industry to meet the growing demands for reliable and competitive supplies of energy.
Bruce DeBaie is a communications specialist with the Canadian Association of Petroleum Producers in Calgary. He has worked in public relations for geological/geophysical service companies and offshore eastern Canada pipeline project proposals. DeBaie has a BA in Public Relations from Mount Saint Vincent University, Halifax, N.S.
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