Reorienting Canada's natural gas exports seems easy enough. In principle, it's like pulling a garden hose from the south side of a garden and then flinging it across the hips to water the needy patches to the west.
American markets to the south are drowning in natural gas, so Canada has to move its pipes toward the energy-thirsty consumers in Asia. But building a steel hose to future LNG facilities on B.C.'s west coast is only a small part of the industry's challenge. For one thing, a fire hose must replace the green garden variety. More problematic is the pressure at the valves: Canadian gas production is down 20 per cent at a time when at least 20-per-cent more will be needed. Can the output be rebuilt – and sustained – in time for end-of-decade exports to the Far East?
The shale gas assault on Canada's natural gas business has been like a blast wave from the U.S. Uneconomic gas-producing regions in the Western Canadian Sedimentary Basin (WCSB) have been levelled as a consequence of the competition.
Canada's gas production is down from a recent peak rate of 17.0 billion cubic feet (Bcf) per day in 2006, to 13.5 today. However, the shrinkage has not been geographically uniform. Weak areas have gone into terminal decline, while strong regions have been left standing, like lone trees on a barren landscape. Ironically, Canadian production that's most distal to U.S. markets, at the greatest competitive disadvantage from transportation charges, has been the least-affected by the changes sweeping North American gas markets. Far-flung, but young, B.C. gas production, rich in profit-enhancing liquids, is still on a growth trend. Deep Basin gas in Alberta's west central region is in good shape too.
Perhaps it's no surprise that Darwinian forces have been the least kind to the mature shallow-gas fields in southeastern and east-central Alberta where most of the 3.5 Bcf/day decline in output has occurred. For example, the once mighty Suffield block that produced close to 3.0 Bcf/day of conventional gas at its peak in the early 2000s is on its way to its last puffs after more than 50 years of yeoman service.
Today, Canada's natural gas output has stabilized around 13.5 Bcf/day, 5.5 of which competitively serves U.S. markets. Domestic production is consumed mostly in the west with a growing fraction needed in Alberta. In effect, shale gas from the U.S. has cleaned out uncompetitive parts of Canada's industry and forced it to balance supply against regional demand.
Yet this contraction in gas production is problematic in the context of eight-to-10 potential LNG export projects seeking to send out up to 10.5 Bcf/day between five and 10 years from now. If only three of the leading projects are built – those championed by Shell, Chevron and Petronas – the incremental natural-gas growth requirement before the end of the decade will be between 4.0 and 7.0 Bcf/day. In other words, Canada's lost production must be built up again.
Prolific play regions in the U.S., like the Eagle Ford and Marcellus, have demonstrated that several Bcf/day of production can be brought online in the span of a few years. Rock quality in B.C. and northwest Alberta is conjectured to be as good to do the same, but merely growing 4.0 to 7.0 Bcf/day of new production won't be enough for what's proposed at the moment – the producers will have to demonstrate that it can be sustained for 20 years. This latter point is key; because a "just in time" delivery system for LNG exports will not be sufficient to secure long-term contracts demanded by international customers.
Geographically, Canada's natural-gas production for export has to be built back up to 2006 levels from more concentrated areas of the WCSB in the west and north, without the benefit of historic volumes coming from the east and southeast of Alberta. Additional challenges consequent from this northerly shift include greater seasonality and more-difficult operating terrain than the plains of eastern Alberta and southern Saskatchewan. It can be done, and it's a huge opportunity for Canada – it just means a lot of capital expenditures in concentrated areas and the likelihood of more corporate acquisitions of gas producers by multinational LNG sponsors.
So, while a lot of the LNG hype over the past couple of years has been on proposed facilities at the back end of the pipe, there will be an increasing focus on the front end, at the wellheads. The issues will magnify depending on the number of projects that move forward over the next couple of years, and the seriousness of the sponsoring companies. The garden to the west can't be watered with a big hose and a little tap.