The National Post is Canada’s second largest national paper.
Adam Waterous is Global Head of Investment Banking, Scotiabank.
$50-billion in infrastructure investment could be needed
The Canadian natural gas market is a game in transition, with new key players, new rules, new winners and the potential for higher prices and an improved industry structure.
With new horizontal drilling and multi-stage fracking – or hydraulic fracturing technology pioneered over the last few years to develop shale gas – we now have close to a 100-year supply of gas in Canada. Canadian natural gas prices have been on a tear in March. After trading at $2.85 per thousand cubic feet (mcf) as recently as February 15, 2013, spot prices have jumped about 20% to about $3.40 mcf.
Despite the recent run-up, however, Canadian natural gas continues to sell at a little more than half of the average price over the previous 10 years. The number of gas drilling rigs in Canada dropped 50% in 2012. Investors in natural gas-weighted companies over the last several years have been crushed, with the value of the Toronto Stock Exchange (TSX) gas-weighted companies falling more than 40% since peaking in 2008. The Alberta and British Columbia governments are forecasting deficits in part because of falling gas royalties.
There is a widespread perception that Canadian gas prices have permanently changed and will remain depressed for a generation. Regrettably, we are playing a losing game with a lousy market, the U.S. Fortunately we have the opportunity to replace the U.S. market with the global liquefied natural gas (LNG) market. LNG is far superior to the U.S. gas market for several reasons.
First, LNG sells at a huge premium to U.S. gas as LNG prices are set globally. Recent prices for Japanese LNG were approximately $15 mcf. After subtracting out the cost to liquefy and transport of approximately $7 mcf, producers in Canada would receive a netback of approximately $8 mcf.
Second, the Asian LNG market is growing much faster than U.S. consumption. Between 2010 and 2020, Asian LNG demand and U.S. gas demand are expected to increase by 83% and 11% respectively.
Third, the major buyers of LNG have very little developable natural gas of their own. We are not competing with local suppliers from the major consumers of Japan, Korea, or China.
Fourth, Canada has competitive transportation costs relative to the other major LNG suppliers.
Fifth, the LNG market is largely based on long-term contracts, making it much less volatile and easier for producers to commit to large capital programs.
In 2012, Canada’s gas production was 13.9 billion cubic feet per day (bcf/d) and we exported 8.7 bcf/d. With prices averaging $2.38 mcf, last year we only generated $7.5 billion in export revenue to the U.S.
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