Those conclusions are in a study prepared by the Brattle Group for the Ingaa Foundation, a research organization supported by gas companies and their supply and service providers.
"The Outlook for Imported Natural Gas" assesses Canadian and Mexican gas imports over the next decade, as well as the prospects for U.S. liquefied natural gas (LNG) demand.
The report estimated Canadian imports to the U.S. could increase to 3.6-4.9 tcf by 2005 from 2.8 tcf in 1996. It said growth will be driven by Canadian producers' interest in gaining a greater share of the U.S. market and by U.S. customers' desires for supply diversity and greater competition among suppliers.
The study indicates a trend toward producer and marketer-supported investments in capacity and a trend toward smaller, incremental expansions designed to grow in lockstep with the market. As a result, more than 7,700 miles of expanded and new pipelines have been disclosed to increase capacity from Canada and from the U.S. Midwest to the U.S. Northeast.
Ultimately, the paper noted, the market will determine what projects move ahead.
Gas grid integration
The report examined the outlook for U.S. imports of gas over the next decade, with emphasis on 2000 and 2005.
It said the North American gas transmission grid is becoming increasingly integrated as the U.S., Canada, and Mexico are experiencing more competitive gas markets due to open-access transportation policies and the evolution of an efficient North American gas commodity market.
"These and other changes in the market have led to increased physical and contractual linkages between the countries' gas systems. In the last 5 years, there has been a dramatic rise in U.S. imports of Canadian gas, facilitated by rapid growth in import pipeline capacity.
"U.S. imports of Canadian gas will continue to grow, but the pace going forward could have very different consequences for the industry. Import growth will have to be approached with care, as it is in the economic interest of the Canadian and U.S. gas industry to avoid capacity gluts-which contribute to boom and bust production cycles-periodically depressed basin prices, and regulatory battles over stranded costs.
"LNG is expected to continue to play a niche role in the North American market, supplying less than 5% of imports through 2005."
The paper said Canadian imports are growing because of ample supplies and because it has been easier to add new pipeline import capacity from Canada.
"This is due to the continuing integration of the U.S. and Canadian gas markets, and reductions in regulatory entry barriers for new projects," the report said. "In particular, the export/import approval processes have become more streamlined."
Mexico's outlook
For the foreseeable future, Mexico is expected to remain primarily an export market.
The report said, "Mexico will be primarily an export market for the next decade. Mexico, particularly northern Mexico, is ripe for increasing gas demand due to growth in domestic and export industries."
The report noted Mexico's demand for gas has been erratic traditionally, but said continuing regulatory and legislative reforms will foster investment and sales opportunities for both foreign and Mexican firms.
The report also indicated that future export opportunities will be affected by how Petroleos Mexicanos adapts to a competitive environment.
Less self-regulation
The paper said traditional contracting and regulatory practices, which would normally ration the amount of capacity, may no longer be constraining.
It said local distribution companies and other end-users are less likely to be the long-term contractual shippers on these import pipelines. That role is now being borne by producers and marketers desiring a transportation path to market.
Also, Federal Energy Regulatory Commission has moved toward a certification standard that emphasizes placing the risk of undersubscription on the proposed pipeline and deemphasizes a showing of incremental, end-use demand to be served by the pipeline.
"While these changes have certainly worked to enhance the integration and liquidity of the gas market, they also increase the risk of overbuilding and, hence, the likelihood of a capacity glut," according to the report.
Gas displacement ahead?
A capacity glut might cause substantial displacement of gas from U.S. pipelines, the report noted.
Firm transportation contracts on U.S. pipelines will come up for renewal sooner (more in the 2000-05 time frame, while new import pipelines will have just signed 10-15 year contracts) making it likely that some portion of the contracts will not be renewed and the capacity turnback problem will be exacerbated.
"This will undoubtedly result in conflicts between U.S. pipeline investors and customers over who bears the cost associated with capacity turnbacks and the devaluation of capacity."
The paper said some of that supply can move to the Southeast, but the projected magnitude of the displacement-and the fact that Gulf Coast producers have their own expansion plan-make it unlikely that the Southeast will accommodate all the gas.
It said prices will likely fall in the Midwest, although prices delivered to consumers may prove problematic depending on who will pay for the stranded U.S. pipeline capacity.
"As a consequence of these uncertainties, the Canadian import expansion projects that can respond flexibly to changing market conditions, such as expansions of existing pipelines that can be brought on in stages via compression and looping, should possess a market and regulatory advantage."
Copyright 1997 Oil & Gas Journal. All Rights Reserved.
