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peter tertzakian

Question: Name a good Canadian product that suffers from weak sales under fierce competition, a swift loss of market share and a stockpile of unsold inventory.

Give yourself 10 points if you answered, "Blackberry."

And another 10 if you followed up with, "Alberta natural gas."

Uncertainty shrouds the future of both. Some of the respective business prescriptions appear to be the same: Innovate, lower supply chain costs and reposition the product in the global market. Specific to natural gas, Canada's once-$50-billion-a-year gas industry, there is still hope for treatment, even though the short-term prognosis looks as bleak as a beleaguered smart phone.

In the world of consumer electronics and the Internet we have come to expect sudden technological change and market disruptions. It feels like winners and losers are decided in less time than it takes to play a cricket match. Contrary to popular belief, the energy business is not slow when it comes to change. Recent upheavals in the century-old natural gas business have been as dramatic as any high-tech product dislocation.

Western Canada's gas producers saw the freight train of change coming around 2007 (coincidentally, the first iPhone came out at the same time). Towers of production growth from different North American regions spanning 2000 to 2013 demonstrate how fast things can change (see Figure 1). Think of each tower as competitor in the $85-billion continental market for natural gas. While Apple, Samsung and Android were the antagonistic labels in the mobile phone space, Barnett, Fayetteville and Haynesville were among the early vandals in the gas world.

Conventional U.S. gas fields, marked "US Non-Shale" in Figure 1, have had their production clobbered by new-age shale gas plays. But the real juggernaut was, and still is, the Marcellus play in Pennsylvania, which has grown to take 13 per cent of the U.S. market in only four short years. Expansion in the Marcellus is unlikely to slow; high quality rocks make the cost of the gas relatively low. But the real competitive advantage of the Marcellus is its geographic position – right under the feet of the consumer.

Unlike Western Canadian gas, the production from Pennsylvania avoids long-distance transport costs to the lucrative Northeast U.S. market. Southern U.S. gas fields, though still prolific, are showing signs of rolling over, also losing share to the Marcellus. From a Canadian perspective, new north-moving pipelines are crossing the border (notably with no political fuss like Keystone XL) into eastern provinces that were once solidly in the sales sphere of western producers.

It's no wonder that Alberta gas production has contracted by 30 per cent in less than 10 years, and has had its competitiveness further clobbered by rising pipeline tolls. The erosion of eastern markets represents a collapse of a supply chain that for almost six decades had been as predictable as a telephone land-line.

It's not a well-publicized story that Alberta's gas producers are down in sales by a collective $30-billion from their peak in 2005. Low prices and the loss of a traditional market are painful, but they can act as a necessary condition for change. What to do? It's not possible to change the product; unlike smart phones, natural gas is a singular commodity with almost no differentiation other than energy content. Yet it's a very valuable commodity outside of North America.

The prescription for Western Canadian producers is not to bother competing in markets where there no longer is an advantage, but to move on to higher value markets in Asia. A dozen players are pursuing this strategy, with Shell, Chevron and Malaysia's Petronas being the most overt about their intentions. Gas fields in British Columbia are ramping up output in anticipation.

The next battleground for the gas business is Asian growth markets where prices are much higher. Western Canadian producers have a significant competitive advantage in their geography – their disadvantage of being too far to the west to serve big American markets is a major plus when serving Pacific customers. Yet geography is not enough to compete. If anything is to be learned from the ultra-competitive mobile phone business, it's that the winning players constantly innovate their processes, build scale, target big markets, keep costs low, and above all – move fast.

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