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Amid oil sands growth, a boom for natural gas

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The rapid growth of Canada's oil sands is expected to dramatically increase its consumption of natural gas over the coming decade, a prospect that stands to help Alberta's gas industry but raise the country's emissions.

A new estimate by Ziff Energy Group, a Calgary-based energy advisory, predicts that oil sands gas consumption will rise to three billion cubic feet (bcf) a day, up from 1.1 bcf today.

The rise will be propelled by a major expansion of the oil sands, which is expected to at least double its output between now and 2020 amid a deluge of spending that will see a substantial increase in Canada's importance as a world oil producer.

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But that rise also carries importance at home. In particular, the oil sands could provide an important boost for Alberta's natural gas industry, which has been in steep decline with low prices and growing competition from the U.S. The province's gas output fell 17 per cent between 2007 and 2010.

That fall demonstrates the significance of an additional 2 bcf a day to the oil sands, which would constitute a major lift.

In 2009, the entire province of Alberta, which is the country's biggest gas consumer, used 2.8 bcf a day. Canada as a whole burned 7.2 bcf – meaning the growth in oil sands alone would add more than a quarter to current usage. And the increase would take a substantial percentage of Alberta's gas output. Last year, the province produced 11 bcf a day; if that remains constant, the oil sands would consume nearly 30 per cent of the total in a decade, up from 10 per cent today.

Ziff based its calculation on a forecast that the oil sands will pump between 3.5 and 4 million barrels a day by 2020, up from 1.5 million today. That outlook is optimistic – the Canadian Association of Petroleum Producers, for example, sees the oil sands hitting 3 million barrels per day in 2020, rising to 3.7 million by 2025.

But even at a slower growth rate, the leap in natural gas demand carries important implications for Canada and the western energy industry.

It could, for instance, deliver additional profits. Ziff calculates that each additional billion cubic feet of demand presses up gas prices by 25 cents (U.S.) per thousand cubic feet.

"So here we're moving gas demand by about 2 bcf. We think prices, all things being equal, will go up by 50 cents," said Bill Gwozd, the group's vice-president of gas services. For gas producers now looking at gas prices around $4 per thousand cubic feet, with little prospect of improvements in coming years, that could be significant.

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"We are struggling to remain competitive in eastern markets … But western gas needs a home. And if the home is oil sands, I think that's great news," said John Rossall, the former chief executive officer of ProspEx Resources Ltd., a gas producer that was bought by Paramount Resources Ltd. earlier this year.

But any growth in oil sands demand may only serve to replace lost markets in Ontario, Quebec and New York, where new so-called "shale gas" supplies have already begun to displace western gas, he cautioned. In fact, the TransCanada Corp. Mainline pipeline, which transports gas across the country, is already flowing half-empty, thanks in part to those issues. That has created painful increases in the cost of shipping gas east – and a boost in oil sands demand could add to the difficulties already encountered by the Mainline.

"That probably would be the longer-term, more severe effect – there isn't going to be enough gas in the TransCanada system," said Ralph Glass, an energy economist who is director, energy valuation and operations for AJM Deloitte.

The other severe effect: emissions. On an energy basis, the Ziff calculation casts into stark terms the cost of producing the oil sands, where the thick bitumen can only be coaxed out of the earth with great effort. Three-billion cubic feet is the energy equivalent of 530,000 barrels per day – meaning that for every seven barrels of crude the oil sands industry produces, it will burn roughly a barrel of natural gas.

Already, Environment Canada projections show that massive increases in oil sands carbon output will wipe out any gains from cleaning up Canada's coal industry. Much of that will come from burning more natural gas, which will add to the difficulty of Canada meeting climate change emissions reduction goals, said Jennifer Grant, oil sands program director for the Pembina Institute.

Oil sands is "a natural gas-intensive industry," she said. "And if we're going to be serious about fighting climate change, we need slower, not faster, additions of new natural gas capacity."

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About the Author
Asia Bureau Chief

Nathan VanderKlippe is the Asia correspondent for The Globe and Mail. He was previously a print and television correspondent in Western Canada based in Calgary, Vancouver and Yellowknife, where he covered the energy industry, aboriginal issues and Canada’s north.He is the recipient of a National Magazine Award and a Best in Business award from the Society of American Business Editors and Writers. More

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