LNG Knocking On Canada's Door, Energy Policy Needed

By Richard Macedo
Nickle's Analytics
Nickle's Daily Oil Bulletin
16 November 2007

Liquefied natural gas will become a more important player in the continent's commodity mix over the next decade helping to maintain a relatively balanced supply and demand situation and steady North American prices, the National Energy Board predicts in its long term energy outlook released Thursday.

NEB Media Release: NEB report says future energy supply ample and will challenge Canadians to make smart energy choices

NEB Report: Canada's Energy Future - Reference Case and Scenarios to 2030
An Energy Market Assessment November 2007

The board also says a long term energy vision and strategy is needed in Canada to balance the multiple objectives on the table. "This plan must be well-integrated at the regional level, consider environmental issues and economic growth, and be developed with input from Canadians," the NEB says. "Only then will be able to overcome challenges ahead and take advantage of the opportunities available."

Despite relatively flat natural gas prices in its reference case scenario, the NEB expects gas drilling in Canada to recover to roughly 18,000 wells per year by 2009. (There was no attempt to incorporate the impact of Alberta's recent decision to increase royalties starting in 2009).

The board report outlines a reference case scenario, one of four hypothetical models used for its Energy Future through the year 2030 analysis. The reference case is the NEB's view of the most likely development of energy demand and supply over 10 years (2005-2015).

"That (scenario) definitely sees more LNG coming in," Paul Mortensen, the NEB's technical leader of natural gas, said in an interview. "There's pretty significant expansion in U.S. capacity coming in next year."

Three LNG import terminals in Canada are expected to be operational by 2015 with annual import volumes around 1.4 bcf per day.

Demand for natural gas increases steadily in the reference case, led by gas use in expanding oilsands operations and greater use as a fuel to generate electricity, the NEB forecasts.

The arrival of LNG on Canadian shores isn't too far off as the Canaport regasification terminal in New Brunswick continues construction and should be operational by the fourth quarter of next year.

Any reduction in net Canadian gas exports over the period is likely to be offset by increased LNG imports into the U.S. and by growing American unconventional gas production. As a result, relatively balanced supply and demand conditions are expected to persist in North American natural gas markets over the reference case period and maintain an average gas price of $6.65 per gigajoule ($7 U.S. per mmBtu).

"I think in the continuing trends case, the middle case, LNG would continue to be a price taker and so the domestic gas price is setting the stage there," Mortensen said. "In that sense it would have no effect on Canadian competitiveness but in the low price case, we are seeing that as an LNG abundant scenario and in that case, there's no incentive for Canadian producers to go looking for higher cost unconventional or frontier gas."

Western Canada is expected to continue to be the primary source of gas production in the reference case.

"The mid-range prices of the reference case and continuing trends encourage some northern development and some continued development of unconventional gas sources," noted John McCarthy, commodities business unit leader. "However, at these prices, it's not high enough to prevent the decline of natural gas production."

High prices in the fortified islands scenario results in an increase in production from northern, offshore and unconventional gas sources, leading to an overall boost in Canadian production.

"The production ... in the triple E scenario declines steeply and this is primarily driven by low...prices for natural gas. Given that this is a collaborative environment with access to global energy, there is an influx of (LNG) imports in this scenario which compensates for the reductions from Canadian basins," he added. "In fact in this scenario, LNG contributes to over half of the Canadian requirements by 2030. This is a scenario where Canada becomes a net importer of natural gas, in effect."

The Triple E scenario is one in which there is a balancing of economic, environment and energy objectives and has the most rigorous environmental policies of the three scenarios.

Despite the resumption of strong drilling activity, a continued downward trend in new well productivity leads to a gradual decline in production over the reference case period. Coalbed methane production in Western Canada increases steadily, reaching 1.4 bcf per day by 2015. Conventional natural gas production from the east coast contributes an average of 430 mmcf per day over the reference case period and includes the Sable project offshore Nova Scotia, the onshore McCully field in New Brunswick and CBM production in Nova Scotia.

Also included is the Deep Panuke project starting in 2010, subject to the necessary approvals.

In the reference case on the oil side, oilsands production rises to 2.8 million bbls per day by 2015, down from three million bbls from the NEB's June 2006 report, due to rapidly escalating costs.

Upgraded bitumen levels expand to 1.82 million bbls per day by 2015 and represents 65% of total bitumen supply. Non-upgraded bitumen levels expand to 970,000 bbls per day by 2015.

The reference case assumes that real crude prices will decrease from the high of recent years to $50 (U.S.) per bbl and remain at this level until the end of the reference period.

"We've learned that energy prices are expected to remain high - higher than historical levels due to primarily international supply and demand issues," McCarthy noted.

Declining Western Canadian Sedimentary Basin conventional oil production is more than offset by increasing oilsands and east coast production.

By 2015, the reference case production levels increase by 61% above 2005 levels, reaching 4.05 million bbls per day which in today's terms would rank Canada as the world's fourth largest producer.

The high oil-to-gas price ratio has resulted in a shift to more oil-directed drilling, the NEB noted. As well, recent success in exploiting the Bakken oil deposits of the Williston Basin in southeast Saskatchewan and in southwestern Manitoba has led to increased light crude oil production. The effect is a softening of the production decline in the WCSB for several years, after which historical decline trends are expected to resume.

Due to the WCSB being a mature supply basin, exploration efforts yield increasingly smaller pools, but development drilling and improved oil recovery (IOR), primarily waterflooding, make up a larger portion of reserves additions.

Following the success of IOR through carbon dioxide (CO2) flooding at the Weyburn and Midale fields in Saskatchewan, it's expected that CO2 flooding in mature oil reservoirs will increase across the WCSB.

In the reference case, production of conventional crude oil and equivalent from the WCSB is projected to resume its decline in the 2009-2010 timeframe, for both light and heavy crude oil, with 2015 production levels of 328,000 bbls per day for conventional light crude oil and 399,000 bbls per day for conventional heavy crude oil. By 2015, conventional crude oil from the WCSB has declined by about 30% compared to 2005 production levels.

Projections for eastern Canada oil production are dominated by the east coast offshore, with only minor amounts of production expected from Ontario. The White Rose field offshore Newfoundland and Labrador became the third producing field in 2005, after Hibernia and Terra Nova. Total production levels are predicted to reach 416,000 bbls per day in 2007 as White Rose expands and Terra Nova returns to full capacity after maintenance work in 2006. The Hebron field begins production in 2013. Contributions from smaller satellite pools in the Jeanne d'Arc Basin are also included, beginning in 2010.

It's also assumed that a new field is found in the relatively unexplored regions of the East Coast, potentially in the Flemish Pass region or in the Deepwater Scotian Shelf. The pool should come onstream in 2015, increasing production levels to 473,000 bbls per day.

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