Canadian natural gas production has rebounded to the highest level in 10 years. At the same time, Canadian producers are facing tremendous headwinds. On the upside, regional gas demand from the Alberta oil sands is increasing too. But competition for market share in the U.S. — which currently takes about one-third of Canadian gas production — is ever-intensifying as U.S. shale gas production is itself at record highs and expected to continue growing. On the whole, net gas flows to the U.S. from Canada thus far have remained relatively steady in recent years, apart from fluctuations due to weather-driven demand. But the breakdown of those flows by U.S. region has shifted dramatically and will continue to evolve as Appalachia takeaway capacity additions allow Marcellus/Utica shale gas production to further expand market share in the Northeast and other U.S. regions. Today, we begin a series looking at what’s happening with gas flows across the U.S.-Canadian border and factors that will influence Canada’s share of the U.S. gas market over the next several years.
Last month in the Don’t Do Me Like That blog series, we wrote about the latest challenges affecting Canadian gas producers: takeaway capacity constraints right in their backyard in the Alberta supply region, which make it difficult for producers to get gas to demand markets, including the oil sands of eastern Alberta as well as export pipelines moving gas across the U.S. border. Natural gas prices at AECO — the national benchmark trading hub in Alberta — last fall were pummeled to record lows and even entered negative territory as gas supply became stranded in the region. Higher oil prices and rising gas demand from the oil sands prompted producers to crank up drilling activity in Western Canada’s Montney and Duvernay shales and spurred gas production to 10-year highs last year, with the growth primarily concentrated in western Alberta. But with limited transportation options from that area, the increased supply overwhelmed gathering and takeaway capacity, culminating in the price collapse. Since then, the arrival of winter heating demand within Alberta has helped ease constraints temporarily, but without additional takeaway capacity, the problems are likely to reemerge come spring as heating demand dissipates.
Today, we turn our attention to a more familiar problem for Canadian producers: competition from U.S. gas shale production, and what that will mean for Canadian exports to the U.S. One reason for the localized constraints is producers’ shift toward targeting the oil sands and domestic gas-fired electricity demand as prospects for export demand diminish and the resulting need to reconfigure Alberta’s pipeline system to accommodate that change. But exports to the U.S. are a big part of Canada’s supply-demand balance and that’s likely to remain the case.