LNG a continental wild card

North America could benefit from tapping into global resource; greater LNG volumes could displace higher-cost conventional, unconventional, frontier supplies

Gary Park

For Petroleum News

Liquefied natural gas could play a key role in ensuring supply-and-demand balance and steady prices in North American markets over at least the next seven years, offsetting declines in Canadian exports and keeping gas prices at an average US$7 per million British thermal units, Canada’s National Energy Board says in a new long-term energy outlook for the 2005-30 period.

LNG also holds the potential to displace higher-cost conventional, unconventional and frontier supplies within Canada.

Under what it calls a Reference Case, which the NEB views as the most likely of four scenarios tested in its study, the federal regulator “definitely sees more LNG” arriving in North America, said Paul Mortensen, the board’s technical leader of natural gas.

Significant expansion of U.S. imports is on the horizon for 2008 and three LNG import terminals in Canada are expected to handle volumes of 1.4 billion cubic feet per day by 2015, he said.

Given the multiple objectives and options on the table, the NEB is calling for a long-term energy vision and strategy in Canada that is “well-integrated at the regional level,” taking into account environmental issues and economic growth and developed with citizen input.

“Only then will we be able to overcome challenges ahead and take advantage of the opportunities available,” it said.

NEB projects growing imports

Projected LNG imports would be the equivalent of 50 percent of Canadian production by 2020 and could slightly exceed domestic production by 2030.

The study noted that in 2005, the U.S. and Canada accounted for 26.3 percent of the world’s natural gas consumption, of which 98 percent was sourced from within the two countries, but 96 percent of global remaining proved reserves are thought to be outside the U.S. and Canada.

“Under certain market conditions, it may be advantageous for North America to tap into a larger share of the global natural resource base and import greater amounts in the form of ship-borne LNG,” the board said.

LNG supply could triple

If a build-up occurs on that scale, the rise in LNG could exceed growth in market demand, forcing LNG suppliers to compete on price “to deliver volumes into already adequately supplied markets.”

Such an outcome could drive prices down to the average marginal cost of LNG, currently about US$5.30 per million British thermal units, Tristone predicts.

At that price level, higher-cost domestic production could be displaced by incremental LNG imports.

The NEB speculated that in recognition of the potential for such price-eroding LNG-on-LNG competition, some current and prospective LNG suppliers have “begun very preliminary discussions of the potential to form a gas equivalent of OPEC to assist in cooperatively managing worldwide LNG supply.”

Terminal expansion planned

In addition, more than 40 new import terminals have been proposed by the U.S. and Canada, although “only a fraction of these might ever be built,” the board said, adding that in general planned terminals for the U.S. Atlantic and Pacific Coasts “have tended to attract greater site-related opposition than those along the Gulf Coast.”

Finally, the NEB suggested North America’s large underground storage capacity compared with other major LNG markets (most located in the Northern Hemisphere) could result in greater LNG imports during the summer months than during the peak heating season.

Role of Arctic gas uncertain

What is less clear, based on the federal regulator’s projections for 2005-30, is what sources will be tapped to offset the shrinkage of conventional gas output from the Western Canada Sedimentary basin as older fields become less productive.

The NEB’s broad conclusion is that gradual declines in basin output could lead to development of additional northern, offshore and unconventional gas sources and to imports of LNG.

But relatively flat to declining overall production and growing demand for gas in oil sands extraction and electricity generation “could eventually diminish Canada’s role as a natural gas exporter.”

The study says the North American market is evolving from one of self-sufficiency to an increasing requirement for offshore liquefied natural gas.

“The scope of imports into North America will depend to some extent on the success of gas projects in Alaska, Mackenzie Delta, the East Coast and non-conventional developments, such as coalbed methane in Western Canada and the U.S. Rockies …” the NEB says.

But it warns that recent cost-escalation for northern projects adds to the uncertainty about in-service dates and raises concerns about whether these projects will proceed.”

The study says that under one of its three scenarios — the so-called Triple E model that balances economic, environmental and energy objectives within well-functioning energy markets, cooperative international agreements and a rigorous energy demand management policy — Western Canada Sedimentary basin production could fall by 80 percent by 2030 from current levels.

That decline would be due to lower gas prices which can’t absorb the “higher costs of producing other gas resources such as unconventional gas or developments in the North.”

The decline emerging from the other two scenarios would be partially offset by the development of unconventional gas in the WCSB, combined with the expectation of more gas production from the North by 2014.

Those two scenarios are labeled Continuing Trends (trends that are apparent in 2005 and are maintained throughout the entire forecast period) and Fortified Islands (dominated by security concerns, with geopolitical unrest, a lack of international cooperation and trust and protectionist government policies).

Under Triple E, the NEB says LNG imports would account for more than half the gas available in Canada by 2030, which would cost less than developing and bringing northern and unconventional gas to market.

In both Continuing Trends and Triple E, imports would gradually exceed exports, making Canada a net gas importer before 2030.

In Fortified Islands, security concerns would curb worldwide LNG supply and high prices would generate development of unconventional and northern gas, allowing Canadian gas exports to rise.

—Gary Park