- The Writer holds听an MSc in Eurasian Political Economy & Energy听from King鈥檚 College London and听also an听MA in European Studies from Sabanc谋 University.
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As the fifth largest natural gas producer worldwide accounting for five percent of global production, and in spite of its large conventional and unconventional reserves, Canada has been hampered by lower prices and declining export markets negatively affecting its gas industry. Not only has Canada鈥檚 export market lost its market share but also its domestic gas market has seen a reduction in its share also. The natural gas sector in Canada is facing a rocky future with U.S. shale gas dominating the natural gas industry on the continent and overshadowing Canada鈥檚 gas industry. This is due to shale鈥檚 lower cost of production and close proximity to gas markets. Consequently, the gas sector in Canada is now at a crossroads.
Canadian gas production historically exceeded domestic demand and its gas surplus was exported to the U.S. market for decades. Following an exponential increase in shale gas production in the U.S., natural gas production saw a sharp decline. Gas production in the Ontario and Quebec provinces declined from 24 billion cubic meters (bcm) to 9.3听bcm听from 2006 to 2014.
In the Alberta province alone, gas export revenues declined from US$29.5 billion in 2008 to approximately $9 billion in 2013. Due to lower prices and the acute drop in export revenues, Alberta鈥檚 royalty income fell tenfold over the period between 2008 and 2014. The gas market鈥檚 erosion in both market share and revenues has continued in other provinces as well from 2009 onwards.
In British Columbia, gas producers lost their market share to the U.S.鈥� unconventional gas suppliers with their offering of short-term spot deals over Canadian producers鈥� long-term gas supply agreements. Pipeline exports to the U.S. market faced their lowest share for over a decade, declining by more than 20 percent since 2009. The Canadian Association of Petroleum Producers expects that Canada鈥檚 export will drop by 50 percent as of 2030, painting a bleak future for the country鈥檚 gas industry.听
With the aim of restoring market share lost with declining export revenues, the Canadian gas industry has been investing heavily in other gas applications to increase its domestic market share such as gas to liquids, compressed natural gas, and LNG trucking. Considering that the Canadian energy industry has been one of the main drivers of its economy, accounting for approximately 10 percent of GDP and 24 percent of its export revenues, the falling revenues since 2009 have forced producers to try to reinvigorate the domestic gas market to remain afloat.
While domestic consumption has been stagnant since 2006, particularly following the exponential production increase in U.S. shale gas, it has hovered around 100 billion cubic meters (bcm). 听Natural gas production has been in steady decline, falling from 170听bcm听to as low as 141听bcm听level in 2012 and production only recovered to as much as 152听bcm听as of 2016. As North American producers continue to further increase their investments in the shale industry, Canadian natural gas is having a difficult time remaining within the bank imposed debt limits.
Following the lower commodity prices, drops in revenues, and the slowdown in economic growth with constrained cash flows, the number of gas drillings plummeted in 2015 and 2016. To compete with U.S. shale, Canadian producers continue to drop prices more, putting the industry鈥檚 financial future at risk. On top of production costs, Canadian producers also have to deal with high transportation costs due to the long distances of big markets in Eastern Canada. Therefore, the market proximity disadvantage that Canadian gas producers face is conversely an advantage for U.S. shale gas producers located near such markets where gas demand is high.听听听
As drilling activity slows down, a downturn in capital expenditure is seen. The Canadian gas sector will possibly be suppressed up to and beyond 2020 unless the domestic gas market share increases or unless LNG export projects are realized with a strategy to lift the current hurdles facing the industry.
Despite the many obstacles in the Canadian LNG sector with future higher capital expenditure, cost pressures and a complex permission framework, if LNG export projects currently on hold are sanctioned, they could revive Canada鈥檚 declining gas market in the medium term. However, current market conditions suggest the future of the gas industry in Canada is not rosy, and only with the help of a stronger domestic market and with new LNG projects coming online, will gas producers be able to maintain their status quo. 听
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- Opinions expressed in this piece are the author鈥檚 own and do not necessarily reflect Anadolu Agency's editorial policy.听
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