CANADIAN GAS INDUSTRY STEPPING UP SHIPMENTS TO SEVERAL U.S. MARKETS

Canadian producers could well be headed into their fourth straight year of record shipments of natural gas to the U.S., their only gas export customer.

Major gas pipelines in Canada report a brisk business in exports. And the biggest system in that country, TransCanada PipeLines Ltd., has just won final government approval for a major expansion (see p. 22).

Planned pipeline projects in Canada and the U.S. directly aimed at increased exports from Canada are worth a conservatively estimated $5.2-5.8 billion (U.S.) in 1990 dollars. The figure varies according to which of several rival proposals gets regulatory and financing approvals.

The total does not include the cost of long range plans to lay a pipeline from Canada's Mackenzie Delta or Alaska's North Slope to connect with southern gas pipeline systems.

Rising U.S. demand for Canadian gas, however, has not translated into a bonanza at the wellhead, The Canadian market is weak, largely because of warmer than normal weather and a sluggish economy.

The U.S. market is weak, too, for the same reasons. But U.S. producers say the difference in rate structure between U.S. and Canadian pipelines gives a price advantage to imports of Canadian gas.

Figures compiled by Canadian Enerdata Ltd., a Markham, Ont., consulting firm, peg Canada's gas exports for 1990 at 1.437 tcf, up 7.5% from 1989. The firm predicts another gain this year (see chart, p. 20).

By contrast, Canadian Enerdata reports, domestic sales by Canadian producers fell 4.5% to 1.914 tcf in 1990, the first yearly decline since 1987. The firm called "most disturbing" a slump of almost 6% in sales to Canadian industrial customers.

The Ontario company said, "The 1990 Canadian gas sales results point to the increasing importance of the export market to Canadian gas producers. Exports accounted for 43% of total Canadian gas sales in 1990, compared with only 33% 10 years ago. By 1995 fully one half of Canadian marketable gas production will be sold in the U.S."

It said Canadian exporters are well positioned for larger increases in gas volume and price as the U.S. market tightens and Canadian gas export capacity rises in the early 1990s.

It expects exports for 1991 to increase a further 8% to 1.552 tcf due to continued strong demand for competitively priced Canadian gas and some addition of export pipeline capacity to the U.S, Northeast and Midwest.

Longer range, a forecast by the U.S. Energy Information Administration sees shipments from Canada rising to a 2.1 tcf peak in 1995 and staying at that yearly level through 2006. That will be followed by a decline to 1.55 tcf in 2010 as Canadian productive capacity falters.

EIA prepared its forecast as supporting analysis for the National Energy Strategy.

PIPELINE SHIPMENTS

TransCanada's first quarter 1991 earnings report pinpointed its increased gas shipments in Canada and to the U.S.

With capacity augmented by facilities built in 1990 and placed in service before the end of the year, TransCanada shipped 444.2 bcf on its mainline system in the first 3 months of 1991. That was an 8% gain from the same period of 1990.

Exports rose 25% to 144 bcf, while domestic deliveries were up only 1.5% at 300.2 bcf.

Nova Corp., Calgary, which operates an intraprovincial gas pipeline in Alberta, moved 792 bcf through its system in first quarter 1991, up about 7% from the same period of 1990. Its shipments out of Alberta were up 9% at 636 bcf, while deliveries in the province amounted to 147 bcf, down 3%.

At the Alberta-Saskatchewan border, gas shipments destined for Central Canada and U.S. markets via Trans-Canada were up 8% at 384 bcf. Gas destined for the U.S. Midwest through deliveries to the Foothills pipeline system jumped 29% to 93 bcf.

At the Alberta-British Columbia border, deliveries were flat at about 142 bcf. This gas was shipped mainly to California markets by Pan-Alberta Gas Ltd., 50% owned by Nova, and by Alberta & Southern Gas Co. Ltd.

Nova expects shipments for all of 1991 to top the record volume of 1990. The company set annual throughput records in each of the past 4 years with volumes of 2.9 tcf in 1990, up 23.5% from 1987

Alberta & Southern, the Canadian gas buying arm of the California utility Pacific Gas & Electric Co., ranked first once again in total exports in 1990, selling 383.4 bcf, or 26.7% of total Canadian exports, up slightly from 383.2 bcf in 1989.

In total, there were 49 companies exporting gas in 1990 compared with 38 in 1989, 37 in 1988, 28 in 1987, and only 19 in 1986.

The 1990 export performance increased Canada's share of the U.S. gas market to an all time high of 7.7% from 7.1% in 1989, 7% in 1988, 5.9% in 1987, and only 4.6% in 1986.

Some Canadian analysts say too rapid expansion of the pipeline system in Alberta has helped create a supply glut with accompanying bottlenecks at Alberta border points.

For example, Paul Ziff, a Calgary energy analyst, says capacity on the Nova system exceeds space on export pipelines by almost 4.5 bcfd, and this has created a bottleneck that could constrain prices for several years. He said more regulation of pipeline expansion may be needed. The Alberta government is studying the question.

Nova says it has only responded to producer requests for expansion. It noted all expansions of production facilities are regulated by the province's energy board, and Nova is not building on speculation.

Nova cut spending plans for expansion in 1991 to $536 million from $671 million because of delays in approval for the related TransCanada expansion.

EXPORT PRICES

Canada's 1990 export sales increase occurred as export prices rose as well, to average $1.97 (U.S.)/Mcf, up 5(z from the 1989 average. However, because of the 1990 appreciation of the Canadian dollar against the U.S. dollar, the average price of exports in Canadian dollars rose only 1.2% to $2.29/Mcf from $2.27 in 1989.

The 1990 price still compares "miserably" with the peak average export price of $4.94 (U.S.)/Mcf realized in 1982, Canadian Enerdata said.

Because of generally slack demand, export prices had fallen to $1.75 in December, $1.41 last January, and $1.04 last month at border points, with some spot prices reported below 90.

Some Canadian industry spokesmen are concerned that continuing weak prices and low industry profits could dampen exploration and development programs aimed at capitalizing on expectations of rising U.S. gas demand.

Canadian Enerdata recently predicted Alberta gas prices will remain low in 1992-93 but rise after that. It forecast that after 1993 Alberta border prices will increase about 17%/year until 1995. when the rate of increase wi II drop to 2.1 %/year until 2000.

ADJUSTING TO PRICES

Most large Canadian producers are continuing to sell gas despite soft prices to maintain their markets and cash flow, but at least one has cut production.

PanCanadian Petroleum Ltd. said last month it decided to shut in about 7% of its production, or 25 MMcfd.

"We estimate the average price we will receive for our gas this year will be at the lowest level in 13 years," said David O'Brien, PanCanadian president.

"As a result of extremely low spot prices, we are currently withholding a portion of our gas supply from the market. "

O'Brien said he expects gas sales to "remain difficult" this year. He does not expect price increases until 1993-95.

The Canadian Association of Oilwell Drilling Contractors says the slump in gas prices is the most worrisome trend facing the Alberta energy industry.

Caodc Managing Director Don Herring noted recently that conventional oil production is declining, and many operators are focusing their efforts on gas prospects. Drilling contractors still expect a better fourth quarter this year than in 1990, but that outlook may need adjustment as companies trim their spending.

The Canadian Petroleum Association said at the end of April companies are cutting back because of low profits. So earlier forecasts of a 10-12% increase in Canadian spending this year could be cut to zero.

THE ROYALTY ISSUE

Producers are campaigning for reductions in provincial government royalties in western Canada which they say are inhibiting gas development.

Gerry Protti, executive director of the Independent Petroleum Association of Canada, says the case for reduced royalties will be made to Alberta, Saskatchewan, and British Columbia in the next few months.

CPA will join in the planned lobbying effort. CPA Pres. Ian Smyth says the industry has done everything possible to cut operating costs. Now governments must look hard at cutting royalties because the "long term health of the industry is at stake."

Studies by IPAC, which represents many small and medium size producers, show gas development is uneconomic at current prices.

Protti says the concern is not only royalties but rising provincial taxes, permits, fees, and access and rental costs that are squeezing producers.

"In relative terms, oil is not the problem. It's gas," Protti said.

The industry says maximum royalties in Alberta, the main oil and gas producing province, consume more than 30% of revenues, compared with about 16% in the early 1970s.

GAS EXPANSION PUSH

If the short term outlook is gloomy, Canada's natural gas industry is still preparing to satisfy forecasts of increased U.S. demand down the road. The Alberta government estimates expansion projects currently planned would increase export capacity from Alberta, most of it targeted at U.S. markets, by 1.98 bcfd.

Major pipeline expansion projects have begun or are well along in the regulatory process to capitalize on growing market demand in the U.S. Northeast and California.

Canadians see U.S. clean air legislation and calls, spurred largely by the Persian Gulf war, for the U.S. to reduce oil imports as important elements in rising gas demand. So is an increasing trend to using natural gas as fuel for power plants, notably cogeneration projects.

Canadian pipeline companies such as TransCanada, Nova, Westcoast Energy Inc., Alberta Natural Gas Ltd., and Foothills are preparing to meet projected demand increases, which are confirmed by long term sales contracts and spirited bidding for pipeline space.

Canadian projects are tied to plans for expansion of pipeline systems in the U.S., such as the Iroquois Gas Transmission System's project to serve markets in the Northeast.

In the longer term, Canadian companies such as Nova and producers such as Gulf Canada Ltd., Shell Canada Ltd., and Esso Resources Ltd. are working on arctic gas export plans which may not see production until the turn of the century or later.

And Shell, as lead partner, began an $825 million development this year of its 2 tcf sour gas field at Caroline, Alta., 75 miles northwest of Calgary.

Gas exploration is strong in Alberta, Saskatchewan, and Northeast British Columbia, led by companies such as Petro-Canada Inc. and Canadian Hunter Exploration Ltd.

The Canadian Energy Research Institute, Calgary, says Alberta will remain the top Canadian producer, but British Columbia will become an increasingly important gas producer in the second half of the 1990s.

It said British Columbia gas will remain competitive because its fields on average are larger than Alberta's and are relatively untapped. Alberta's gas fields are mature and will increasingly be displaced by supplies from the Canadian Arctic and Alaska.

CERI predicted British Columbia gas production will rise from about 330 bcf in 1988 to more than 800 bcf in 1997. Alberta production will increase from 2.5 tcf to 3.6 tcf in 2002, then decline to 3.4 tcf in 2007.

CERI said the British Columbia growth will occur even if the province's reserve base is less than current estimates of 50 tcf, or about one third of Alberta's.

CPA books Canada's gas reserves at the end of 1989 at 96.6 tcf, with 71.6 tcf of that in conventional reserves and 25.4 tcf in frontier areas such as the Mackenzie Delta.

MORE DEMAND FORECASTS

A number of forecasts are on the record pointing to steady growth in U.S. markets for Canadian gas. They vary, but most expect exports of 1.8-2 tcf/year in the next 5 years.

The National Energy Board, Canada's major regulatory body, forecasts gas exports will increase to 2 tcf, more than 50% above current deliverability levels.

NEB figures show exports in 1989 represented about 39% of Canadian gas production. Sales to California accounted for 37% of exports, and 40% went to Midwest markets. The Pacific Northwest took 13% of Canadian exports, the Northeast 8%, and the Rocky Mountain region 2%.

Board Chairman Roland Priddle says there will be no big surge in exports until there are major expansions of pipelines.

Rick Hillary, a Calgary energy consultant and former gas manager with IPAC, predicts Canadian gas exports will increase in the next 5 years to 2-2.2 tcf/year. Increased demand will come mainly from three sectors: electrical power generation, industrial customers, and transportation, with the Clean Air Act as a major growth factor.

He cited several studies that indicate U.S. power generation demand will increase by 3-3.5 tcf/year to comply with clean air requirements.

"It's going to pose some problems and opportunities for Canadian and U.S. producers to meet the projected demand," Hillary said.

"That's why it is important for the industry to look beyond the temporary oversupply problems, pipeline access, and low netbacks. We have to see where the real demand of the 1990s and of the next century will propel this industry."

Bruce Simpson, head of Nova's pipeline division, says an expansion plan for the Alberta system is based on forecasts that Canadian gas sales to the U.S. will reach 1.8 tcf/year during the next 5 years.

WEST COAST MARKET

Among projects to serve the U.S. West Coast market, Pacific Gas Transmission Co., San Francisco, plans a $1.2 billion, 75% expansion of capacity on its Alberta-California pipeline system, which has current capacity of about 1 bcfd. The company believes the expansion is needed if critical supply shortages are to be avoided.

The expansion, which would move another 755 MMcfd of imports to California and 148 MMcfd to the Pacific Northwest, requires regulatory approval. PGT aims for completion in the fall of 1993.

Shippers including Southern California Edison Co. and San Diego Gas & Electric Co. oversubscribed available space at an auction with bids totaling 2.5 bcfd of space during 30 years. PGT has placed pipe orders worth about $500 million U.S.

PGT, which gets about 50% of its gas supply from Canada, plans to buy more gas this year to offset reductions in hydroelectric power due to drought.

The Altamont group is seeking approval for a rival pipeline project to serve the California market.

The group, headed by Tenneco Gas, proposes a $573 million (U.S.) system from Wildhorse, Alta., to Opal, Wyo. It would connect there with the Kern River Gas Transmission System, a project that also includes Tenneco in a $710 million, 900 mile line from Wyoming to Bakersfield, Calif.

Altamont, with a proposed capacity of 719 MMcfd, has a projected completion date in late 1993. It also has been oversubscribed with bidders seeking 1.68 bcf in space at an auction earlier this year. Amoco Canada Ltd. remains a member of Altamont but Shell Canada and Petro-Canada have withdrawn as equity partners. Montana Power, Butte, Mont., also is a member.

Westcoast Energy Inc., Vancouver, B.C., is basing a substantial expansion of its pipeline system in that province on forecasts of increased demand in the U.S. Pacific Northwest.

Westcoast plans to spend $1 billion during the next 3 years in expansions to meet domestic and export demand. The company figures about I bcfd of additional gas will be needed in the next 5 years in the Pacific Northwest and California.

Westcoast connects at border points with the Northwest Pipeline system.

U.S. NORTHEAST

Western Gas Marketing Ltd., marketing arm of TransCanada, says TransCanada capacity to the Northeast increased to 397 MMcfd in 1989 and now stands at about 605 MMcfd, bringing total export capacity for the Northeast to about 714 MMcfd. Subject to regulatory approvals, in 1991 and 1992 TransCanada will add about 1.113 bcfd in various projects.

All expansion on the TransCanada system for the forseeable future is fully booked by firm customers, Western says.

In the mid-1990s a proposed Portland pipeline system could move 400 MMcfd to New England by 1996. Western estimates the U.S. Northeast then will have access to about 1.8 bcfd of Canadian gas, accounting for about 20% of the region's requirements. That would be an increase from a 2% market share in 1979.

David Ellerton, a Western sales executive selling to the U.S. Midwest, expects growing competition from U.S. marketers. He says U.S. sellers are becoming increasingly sophisticated and there are "a lot of smart players" moving into the gas market. A strong Canadian selling point is a reputation as a reliable long term supplier, but Canadian gas also will have to be competitively priced.

Another project, Empire State Pipeline, would funnel western Canadian gas from Niagara Falls, N.Y. to Syracuse, N.Y.

The line, with a capacity of 250 MMcfd, is sponsored by units of Union Energy Inc., Toronto, Coastal Corp., and Rochester Gas & Electric Corp.

U.S. MIDWEST

There also are plans proposed to deliver more Canadian gas to the U.S. Midwest.

Northern Border, Omaha, Neb., has disclosed plans to increase its capacity by 70% to 1.7 bcfd with an initial addition of 450 MMcfd, including a 373 mile extension of its system into the Chicago area.

Northern Border is part of the prebuild southeast leg of the uncompleted Alaska Natural Gas Transmission System. The system is operated in Canada by Foothills Pipelines Ltd., Calgary. Pan-Alberta is the major gas marketer for the system.

The Northern Border project will create a link with Northern Natural Gas Co.'s system, which will move Canadian gas into Chicago and tie in with U.S. pipeline systems to other markets.

Northern Border has disclosed it agreed to pay $90 million (U.S.) for a 150 mile system built by Northern Natural. It will connect Northern Border's terminal at Ventura, Iowa, into the Northern Natural mainline into Chicago. Northern Natural, a unit of Enron Corp., Houston, serves markets in Kansas, Nebraska, Iowa, South Dakota, Minnesota, Wisconsin, and Michigan.

LONGER RANGE PLANS

Looking at the long end of the market potential, major Canadian energy companies are involved in an $11 billion project to ship gas from the Canadian Beaufort Sea and Mackenzie Delta. Target markets are in the U.S. and eastern Canada.

Esso, Gulf Canada, and Shell Canada received conditional approval in 1989 to ship 9.2 tcf of gas south during a 20 year period. Their permit would allow exports to begin between November 1986 and Oct. 31, 2000. NEB has rejected appeals from nationalist and environmental groups to reverse its ruling.

The companies still have to submit proposals and receive economic and environmental approvals for a pipeline to connect with existing systems. Optimistic forecasts call for completion of such a project toward the end of the 1990s.

Lead time for construction to join up with pipeline systems in northern Alberta is about 4 years.

U.S. buyers such as Enron, Texas Eastern Corp., Pacific Interstate Transmission Co., and Tennessee Gas Pipeline Co. have signed precedent agreements confirming intentions to sign firm, long term, gas purchase contracts.

Nova's Foothills Pipe Lines Ltd. has long term plans to ship gas from Alaska and the Mackenzie Delta.

In Alaska, Foothills is a partner in still-shelved plans for a pipeline connection from Prudhoe Bay to Caroline in northern Alberta.

Foothills also is involved with Esso, Shell, Gulf, TransCanada, and Polar Gas in plans for a pipeline from the Mackenzie Delta.

Nova is the sponsor of a project known as the Dempster Highway lateral. It would move gas from Inuvik in the Mackenzie Delta to meet an Alaskan gas pipeline system at Whitehorse, Yukon.

Foothills recently signed a 10 year extension of an agreement with Ottawa to build the Dempster system. The company believes it is positioned to participate in whichever project is selected to move arctic gas.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.