U.S. and Canadian energy markets have been closely linked for many years as excess Canadian oil and natural gas production supplied U.S. demand.
U.S. and Canadian energy markets have been closely linked for many years as excess Canadian oil and natural gas production supplied U.S. demand. Now, however, increasing oil and natural gas production as well as delays in regulatory approvals for Keystone XL pipeline are pushing Canadian companies to seek overseas exports.
The issues as seen from Canada include:
♦ Canadian pipelines are at or near capacity while oil and natural gas production is growing.
♦ Canadian oil and gas exports now go almost exclusively to the United States.
♦ Growing U.S. oil and natural gas production could significantly reduce demand for Canadian energy.
The International Energy Agency (IEA) 2012 World Energy Outlook predicted the United States would become the world’s largest oil producer, overtaking Saudi Arabia by 2020. The U.S. Energy Information Administration (EIA), although less enthusiastic, is predicting that U.S. imports will decline and U.S. oil production will meet 62 percent of domestic demand in 2020.
♦ The Keystone XL pipeline that will transport Alberta oil-sand production to the United States is suffering permitting delays and environmental protests.
♦ Canadian oil sold to the United States receives significantly lower prices than would apply to Asian exports, reflecting the spread between West Texas Intermediate and Brent benchmark prices.
♦ Also fueling the interest in exports is Asia’s continuing demand for oil and the region’s growing demand for natural gas. IEA projects Asian natural gas consumption will grow over 200 percent between now and 2035.
As the world’s largest oil importer and the largest customer for Canadian energy, U.S. consumers also are concerned about Canadian exports. Despite rosy IEA projections, the United States is likely to depend on Canadian imports as a secure, low-cost source of oil for many years.
The stories for oil and natural gas are different but the options for both resources are rapidly changing and controversial.
♦ Canadian oil exports
Currently, Canada produces over 3.3 million barrels of oil per day (bopd) – including upgraded bitumen, heavy oil, light oil and condensate. About 2.5 million bopd are exported to the United States.
Canadian oil production, already sixth largest in the world, should grow significantly; Alberta oil sand production is projected to grow from the 1.5 million bopd currently produced to 3.7 million bopd in 2025.
This volume, obviously, will require markets outside Alberta.
However, the two dominant pipeline options, Keystone XL and Northern Gateway, are both facing potentially serious delays.
The Keystone XL pipeline is awaiting U.S. State Department approval or rejection of the TransCanada Corp. May 2012 application. This new application provides alternatives to routes through the Nebraska Sand Hills that contributed to the rejection of the 2011 application.
The Nebraska Department of Environmental Quality has released its draft evaluation report, which notes the revised pipeline route addresses the major concerns about the original route. The Nebraska evaluation is considered a strong indicator of U.S. approval, although pipeline advocates are still unsure the pipeline will be built.
A State Department decision is expected in the first quarter of 2013.
Canadian oil exports to Asia are primarily tied to the approval and construction of the Northern Gateway pipeline, a 1,177 kilometer (731 mile) west-flowing, 525,000 bopd heavy-oil pipeline paralleled by an east-flowing condensate pipeline that will be the source of diluent to thin the heavy oil for transport. The pipeline system runs between Alberta and Kitimat, British Columbia.
Environmental groups and British Columbia First Nations oppose the pipeline. Alberta and British Columbia premiers also are arguing about how pipeline revenues will be split.
As controversies slow both the Keystone XL and Northern Gateway pipelines, smaller-volume alternatives are being proposed, including:
- Reversing and reconfiguring a natural gas pipeline to ship oil east to Ontario and Quebec.
- An expansion of the 300,000-barrel per day Trans Mountain pipeline system that moves Alberta oil to refineries near Vancouver, British Columbia, Washington and California.
- Rail transport of oil.
♦ Canadian natural gas exports
Canada is the third largest natural gas producer in the world, producing 5,218 billion cubic feet (bcf) in 2011. Canada’s net natural gas exports in 2011 were 2,168 bcf.
As both U.S. and Canadian unconventional natural gas production grows and the United States imports less natural gas, Canada will need Pacific coast liquefaction plants and export terminals.
Canada currently has one operating liquefied natural gas (LNG) import facility, the Canaport terminal in Saint John, New Brunswick, which brought in 107 bcf in 2011, about 30 percent of its capacity. There are no active LNG export facilities in Canada.
Kitimat LNG and LNG Canada have proposed LNG export facilities totaling a maximum of 34 million metric tons per year of gas at the Port of Kitimat, B.C. An LNG export facility also is proposed at Prince Rupert, B.C., and additional LNG export proposals are expected.
One proposed U.S. LNG export terminal, Oregon LNG, would export Canadian natural gas from Oregon.
Paralleling Canada, U.S. companies are proposing LNG export projects.
♦ Price impacts of U.S. and Canadian natural gas exports
While natural gas export revenue appeals to producers, U.S. and Canadian consumers dread higher prices that could result from reduced domestic supply.
Industry could be especially hard hit by rising energy prices. Canadian industry – including pulp and paper, chemical and fertilizer, iron, metals, and petroleum production and refining – represent almost 50 percent of Canadian energy consumption. U.S. industrial energy consumption is lower – about 26 percent in 2012 – but is rapidly growing in response to production-driven low energy prices. Reduced energy supply and higher energy prices could constrain industrial growth in both countries.
Controversy over constructing export facilities is expected to slow pipelines, liquefaction and port facilities over the next few years – and may defeat many proposals. Over the past two decades some energy-transport proposals have failed – the Mackenzie Delta and Alaska North Slope natural gas pipelines, for example, plus dozens of proposed LNG import terminals in Canada and the United States.
Therefore, it seems safe to predict that some of the proposed facilities will not be constructed, even if it is impossible to predict which will be built and which will not.
Ross Clark, the president of AAPG’s Canada Region, has made recommendations to this article and provides the following conclusions:
“So, at the time of this writing it appears that there is a tremendous amount of corporate and regulatory effort being expended on optimizing market conditions for oil and gas in an attempt to minimize the differences in commodity prices around the world and capture some of this price upside for North American producers, including the U.S. and Canada.
“Global arbitrage pricing differences of 20 to 30 percent for oil and 300 to 500 percent for natural gas have spurred the effort to open the very competitive North American market to world markets – especially the fast growing Southeast Asia natural gas market.
“The increased revenue received for North American oil and gas in a global competitive market place will lead to further investment in the search for energy worldwide. However, the effort to expand markets by developing infrastructure will need to be balanced with concern for the environment and the rights of stakeholders being directly affected by this development.
“It is an especially exciting time in the midstream portion of our industry and in the government regulatory agencies dealing with the proposed expansion.”
Stay tuned!