Americans are moving quicker than Canadians to secure profitable markets for Canadian natural gas.
On Wednesday, Apache Corp. (APA) of Houston bought control of Canada’s only proposed export facility for Liquid Natural Gas [LNG], located in Kitimat B.C., for an undisclosed sum. Why?
They see the US market for Canadian natural gas is dropping, as fast rising US production of low cost shale gas makes Canadian gas uncompetitive and increasingly unnecessary.
Apache has just spent hundreds of millions of dollars developing a 10 trillion cubic feet natural gas resource in the Horn River Basin on the B.C. Yukon border (over $200 million in 2010 alone). That’s a large investment – and a large resource – to be potentially stranded, if abundant low cost shale gas in the US keeps prices depressed for years.
So Apache is doing something about it before the Canadian producers are – they are securing international access for their Western Canadian natural gas by taking effective control of the Kitimat LNG facility.
“The growing supply of natural gas in the United States and Canada is transforming North American energy markets, and this increased resource has significant potential for global impact,” said Apache CEO G. Steven Farris in the news release announcing the deal.
In layman language, Farris is saying there is now a huge amount of low cost shale gas production in the US that Apache’s Horn River gas can’t compete with – especially with the huge transport costs from Horn River on the Yukon-BC border, all the way to New York City. So they’re looking for bigger profits internationally.
“The cost of transporting gas down from Canada is not as competitive as it once was,” says Jack Weixel, Director of Energy Analysis for Bentek Energy, one of the top energy information consulting firms in the US. “All the new pipelines have flattened pricing in the US, and lowered desire for Canadian gas.”
The new $6 billion Rockies Express pipeline, completed in 2009, now takes huge volumes of gas from Colorado to Ohio, and Weixel says several other continental pipelines have greatly increased the ability of the US to supply its own gas needs to every corner of the country.
Denver-based Weixel says US marketed natural gas production was up 1.7 bcf/d in 2009, about 3% over 2008, while Canadian natural gas imports were down 1.2 bcf/d, or 14.8% in 2009 over 2008. Most of that decline was to the lucrative US Northeast market.
Other industry experts suggest the US will have a huge need for Canadian natural gas in the future. Bill Powers, editor of the Powers Energy Investor newsletter, has compiled a basin-by-basin analysis of expected future production in the US. By his calculations, the very high decline rates in the first year of production – up to 85% in some of the shale gas plays – will cause a natural gas shortage in the US by 2011.
This would clearly create a huge opportunity for Canadian gas producers.
Weixel says the high decline rates are very real, but is still cautious on the future of Canadian gas exports to the US.
“Producers can now punch more holes in the ground at a faster pace. They can keep with higher decline rates that unconventional plays show.”
“Is that sustainable, that’s a good question. But for the near term it is, and there are a lot of unconventional plays on tap. These shales can produce in a US$3 (per mcf/d) environment.”
Apache knows that its 10 trillion cubic feet of Horn River gas can’t make money at that price. And even if that production won’t get to market until 2014, they are concerned enough that the new US shale gas could keep prices depressed for years. So they hedged their production in a different way, by taking control of Kitimat.
I wonder what the Canadian natural gas industry is doing to prepare? When I talk to industry executives in Calgary, they mostly talk about the government of Alberta reducing its royalty rate. That’s only part of the issue.
The Alberta Competitiveness Review is supposed to be addressing many of these issues, but industry groups such as SEPAC (Small Explorers and Producers Association of Canada) have complained since last summer that momentum has stalled on this issue. A new energy minister in Alberta was announced this week, and industry insiders tell me that they expect this to be a catalyst for government action.
Disclosure: No Positions
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