Natural gas industry could dwindle without LNG facilities

The situation facing Canadian natural gas producers might be thought of in terms ofa bakery that sells all its bread to the same customer every day. That's fine until the customer opens his own bakerynext door, and the original bakerknocks on the door and asks if they need any bread.

Failure is we don't get anything off our coast. Then we're in trouble.- DaveTulk, GPMI

Historically, the United States has been the main buyer of Canada's oil, natural gas, propaneand other petroleum goods.In the last five years, this relationship, symbiotic for so long, has seen profound changes as commodity prices have fallen and U.S. productionhas undergone a dramatic reversal of fortune because ofthe emergence of prolific shale oil and gas plays.

At the same time, Canada is still trying to ram its oil and gas across the border.Like in the case of competing bakeries, however, the demandis only so big.

• Natural gas prices eyeing multi-decade lows
• LNG exports begin from U.S. as Canada sits on sidelines
• U.S. shale producers poised to raise output if oil hits $40 a barrel

"[We're] very concerned about it. We are losing our market in the U.S. for our gas," said Dave Tulk ofCalgary-based Gas Processing Management Inc. "The ability of our gas to compete with the gas coming out of the shale plays it's a real concern."

'We, as Western Canada, need LNG'

Similar to the Canadian oil industry's desire for new export pipelines, the natural gas industry is also craving anoutlet to international markets. Several Liquified Natural Gas (LNG) facilities are proposed for British Columbia's coast, but there is considerable uncertainty whether any of them will be built. If they aren't,there is little doubtCanada's natural gas industry will suffer, especially as the U.S. market dries up.

"We, as Western Canada, need LNG to go off our west coast," said Tulk."That creates a huge number of opportunities for us in terms of sustaining and growing our gas industry, sustaining and growing our LNG and petrochemical industries. Getting LNG is a critical strategic project that needs to happen for Canada."

Dave Tulk with GPMI says LNG export plants are critical for the natural gas industry.

8 years ago

Duration 0:50

A gas industry consultant is concerned LNG export facilities won't be built

Companies want to export natural gas because world prices are much higher than in North America.

There are some domestic opportunitiesfor natural gas producers opening up in Alberta. The province is beginning to shift away from coal-fired power plants, and natural gas electricity generation is expected to make up much of the shortfall. In addition, the provincial government is also offering$500million to attract new petrochemical facilities.

However, these possibilities don't amount to much of a contingency in case LNG export facilities are not constructed. Without LNG, experts say, the Canadian natural gas sector will contract.

"Failure is we don't get anything off our coast. Then we're in trouble," said Tulk."We absolutely need this option to stop the irreversible decline of our gas industry."

Work in gas fields drying up

The notion that the industry could collapse without LNG isn't new. Industry representatives haveexpressed a similar sentiment in the past, although the sense of urgency now is noteworthy. Natural gas prices are free falling, and there is little movement on the LNG front in B.C.

While gas producers would benefit from an LNG export facility, the economics for a company to build such a multi-billion-dollar plant aren't as rosy as they once were. Global prices are no longer as lucrative.

Two years ago, countries such as Japan and India were paying around $20 US per million British thermal units (MMBtu)of LNG, but in the last few months have only paid about $5 or $6. Weaknesses in Asian economies are largely blamed for the drop.

Gas producers in B.C and Alberta were only collectingroughly $2 US per MMBtu in recent months, and that's why they so badly want an LNG facility. However, the price differentialmight not be large enough fora company to justify constructing a massive export terminal.

Meanwhile, work is beginning to dry up in gas fields, andoptimism is hard to find.

Last month, Shell postponed a decision on its proposed plant in Kitimat, B.C. A few weeks later, AltaGas shelved development of its DouglasChannel LNG plant near Kitimat because of poor economic conditions and worsening global energy prices.

Besides natural gas, the market for natural gas liquids (NGLs), such as propane and butane, is also suffering because of the same market factors.

"The declining value of Canada's net NGL exports is partly the result oflow NGL pricesand increased competition from rising U.S. propane production, which has increased 40 per cent since 2011," said the National Energy Board in January.

• Shell postpones decision on LNG plant in Kitmat

Prices for natural gas and NGLs are not expected to increase for Canadian producers in the near future. There is surplus natural gas in the U.S. as that country begins to export its own gas through LNG facilities.

"We're seeing natural gas prices get pressured to lows that we haven't seen in 17 to 18 years," said Martin King, a commodities expert at FirstEnergy Capital in Calgary,in an interview with CBC News earlier this month."It's a wake-up call for some portions of the industry."

Canada'slargest natural gas producer, Encana,lost more than $600 million in the most recent quarterand said it would cuta further 20 per cent of its workforce.

Environmental concerns

While Canada's gas industry fully supports construction of LNG export plants on the west coast, there are concerns about the environmental impact of such facilities.

For instance, the proposedPacific NorthWestLNG projectcould become the largest carbon polluter in Canada if upstream emissions are taken into consideration, according to the PembinaInstitute, an environmental think tank.

"Canada promised in the Paris Agreement and Vancouver Declaration to reduce carbon pollution to address the climate crisis," saidMatt Horne, Pembina'sassociate regional director for B.C., in a statement. "Stronger climate policies,not increased fossil fuel production,are the climate solution."

In addition, the group estimates the proposed facilitycould account for 75per centto 87 per centof the emissions allowed under B.C.'s 2050 target.