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Canadian natural gas industry faces threat amid U.S. production shift

In its report, the U.S. Energy Information Administration said the largest surge in gas exports would come as a result of rising sales to Mexico, which is using U.S. gas to transform its electricity sector.

Charles Mostoller/Bloomberg

The U.S. is becoming a net exporter of natural gas, with its new pipeline plans posing additional threats to Western Canadian producers intent on defending markets in Central Canada and the United States.

"The United States has been a net exporter for three of the past four months and is expected to continue to export more natural gas than it imports for the rest of 2017 and throughout 2018," the U.S. Energy Information Administration (EIA) said in an analysis published Wednesday.

It pointed to growing exports of natural gas by pipeline to Mexico, as well as expanding capacity for liquefied natural gas shipments with five new projects currently under construction.

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The U.S. government agency also forecast that supplies of natural gas out of the Marcellus and Utica fields in Appalachia "are likely to gradually displace some pipeline imports from Canada" to midwestern states as well as result in increased exports of U.S. gas to Ontario and Quebec.

The EIA forecast comes as Enbridge Inc. presses the U.S. regulator, the Federal Energy Regulatory Commission (FERC), for quick approval of its stalled Nexus Gas Transmission line, which would deliver 1.5 billion cubic feet a day of gas into the northern Midwest and Ontario.

As well, Energy Transfer Partners LP is building its Rover pipeline to deliver 3.25 bcf/d into those same markets.

Canadian producers have been in a pitched battle to defend their markets in Central Canada and the northern United States as the shale-gas boom took hold over the past decade.

Western Canadian producers agreed earlier this year with TransCanada Corp. on a long-term deal to reduce tolls on the company's mainline pipeline that delivers natural gas to the Dawn Hub in Southwestern Ontario, which can feed markets in Canada and the United States.

Analysts said Wednesday that the TransCanada deal is crucial for Canadian companies to compete in those regions.

"We think Canada will still maintain a good amount of its market share," said Matthew Hoza, an analyst with Denver-based BTU Analytics LLC. The TransCanada agreement "really cemented market share into the upper Midwest – the Chicago, Michigan, Dawn markets."

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However, the Canadian suppliers will have to continue to offer steeply discounted prices in order to remain competitive with Marcellus and Utica gas.

Still, Mr. Hoza said the U.S. producers will likely succeed in capturing some market share from the Canadians as new pipelines are completed.

The Nexus project was delayed for months after a FERC commissioner resigned, leaving the regulator without a quorum. With new commissioners now confirmed, Bill Yardley, the company's president for gas transmission, wrote FERC last Friday, urging immediate issuance of the certificates needed for it to commence construction on Nexus.

However, Mr. Hoza questioned the commercial viability of Enbridge's Nexus pipeline, saying the company had less than two-thirds of the capacity contracted, while tougher competition from the TransCanada shippers would erode expected revenue.

Enbridge spokesman Adam Parker said the company was in discussion "with a number of interested parties" that it expected would lead to subscribing for the remaining capacity on Nexus. He said growing utilization of natural gas for power generation will help buttress demand.

Appalachian producers are also eyeing other markets to absorb growing supply.

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In its report on Wednesday, the EIA said the biggest surge in gas exports would come as a result of increased sales to Mexico, which is using American gas to transform its electricity sector, and from LNG facilities.

There are five LNG plants now being built, which will add capacity to recently completed facilities such as Cheniere Energy Inc.'s massive Sabine Pass terminal. All told, U.S. LNG export capacity will grow to 9.5 bcf/d by 2020, from 1.4 bfc/d at the end of last year, the EIA said.

The expansion of U.S. export capacity provides some good news for Western Canadian producers, said Dulles Wang, Calgary-based analyst for Wood Mackenzie. Low-cost Canadian suppliers can ship through the expanding American pipeline network and export gas by way of the U.S. LNG terminals, he said.

At the same time, gas that might otherwise be targeted at the Midwest or Ontario will be "pulled southward" to LNG and Mexican markets, he said.

He, too, believes Canadian producers will largely succeed in defending their Midwest and Central Canadian markets, particularly given the expected growth in demand.

"In Western Canada, we have very cost-competitive resources, so they compete very well with the Northeast supply from Marcellus or Utica," Mr. Wang said. "Having more export capacity out of the U.S. is actually a good thing because the market is so integrated."

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About the Author
Global Energy Reporter

Shawn McCarthy is an Ottawa-based, national business correspondent for The Globe and Mail, covering a global energy beat. He writes on various aspects of the international energy industry, from oil and gas production and refining, to the development of new technologies, to the business implications of climate-change regulations. More

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