Energy and Natural Resources

Shale Gas Squeezes Out Canadian Producers, Report Says

20 March 2017

Prospects for Canada's natural gas producers have fallen as strength in U.S. production led to weaker demand for Canadian gas and low prices, according to The Conference Board of Canada's latest Canadian Industrial Outlook: Gas Extraction.

"North America's regional natural gas market has changed greatly over the last decade. Rising U.S. shale production has increasingly squeezed Canadian natural gas out of some U.S. markets," says Carlos A. Murillo, an economist with the Conference Board of Canada.

And not only is the U.S. market moving toward self-sufficiency, but the U.S. gas industry is also beating Canadian competitors in the race to enter global liquefied natural gas (LNG) markets.

Following pre-tax losses of C$7.6 billion ($5.69 billion) in 2016, Canadian natural gas producers can expect losses to narrow down to C$2.8 billion this year, mainly as result of rising commodity prices.

Rising U.S. production levels are squeezing Canadian natural gas out of some U.S. markets.

Natural gas prices across North America reached their lowest levels in nearly two decades last year, but are expected to climb over the next five years, the report says.

Upside to the industry's outlook is possible given the recently successful open-season results for TransCanada's mainline. The current outlook does not incorporate the potential impact from this deal on Canada's industry.

U.S. natural gas production increased by 40% in the last decade, mainly due to rapid increases in U.S. shale gas output. In the meantime, total Canadian production stagnated. Today's U.S. shale production is about three times greater than total Canadian production, the report says. With U.S. shale gas production displacing imports of Canadian gas, Canadian exports are now 25% lower than they were 10 years ago.

North American natural gas demand is expected to remain relatively flat over the forecast and Canadian exports to the U.S. could continue to decline over the next five years. Although natural gas use in Canada's electricity generation and industrial sectors will increase, these gains will not be enough to offset a potential decline in exports.

"The need for Canadian gas in North America will continue to fall over the forecast," says Murillo. "Unless a large domestic LNG export facility is built, Canadian production levels will continue to fall in the coming years."

Opportunity in LNG Export

But it is not all bad news for Canada's industry, the report says. The buildup of U.S. LNG export capacity in the coming years, and the associated contractual obligations, indicate that export increases will outpace production gains in the U.S. This creates an opportunity for Canadian gas to help fill some regional demand in the United States, the report says. Moreover, some Canadian producers are signing contracts to export gas as LNG via the United States. This suggests that while LNG export facilities in the U.S. are competing head on with Canadian projects, they may also provide a new marketing outlet.

TransCanada's recent success in securing long-term commitments for its mainline is another positive development for the industry.

"Key to this deal is that Western Canadian gas may manage to hold on to, and possibly increase, its market share in Central Canada and the northern United States," says Murillo. "Since our current outlook doesn't incorporate the impact of this deal, it shows the potential effects on Canada's industry from failing to reach such necessary consensus between shippers and pipeline owners."

In 2016, above-average temperatures helped drive natural gas inventories well above historical norms. Combined storage levels in Canada and the U.S. in 2016 were close to 20% higher than their five-year average. This sent prices to their lowest levels in nearly two decades. However, prices are expected to recover, as rising U.S. exports and increased industrial domestic demand help push prices higher starting this year. Canadian prices are forecast to rise from $3.13 per million British thermal unit (MMBtu) in 2017 to $3.82 by 2021.

On the financial side, the industry will remain in "survival mode" in the coming years, the report says. While industry revenues are expected to increase over the forecast, this is due mainly to higher prices rather than greater production volumes. Furthermore, although industry losses are beginning to narrow, it will take until late in 2018 for the industry to return to profitability. Following pre-tax losses of C$7.6 billion in 2016, Canadian natural gas producers can expect losses to narrow down to C$2.8 billion this year.

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