U.S. pounces on Canada to deflate gas surplus
U. S. gas drillers battered by the lowest prices in 17 years have found another release valve for their output: Canada.
Over the past five years, the shale boom that unlocked vast supplies of natural gas across North America has tripled pipeline shipments from the U. S. to Mexico, and spurred the first seaborne exports from the lower 48 states. Now, pipeline companies led by Spectra Energy Corp., Trans Canada Corp. and Energy Transfer Partners LP are gearing up to more than double the flow into Canada by 2027, according to the Canadian Energy Research Institute.
The push begins next year, with plans to open or expand at least three major pipelines, and reverse the flow northward in a fourth. Trans Canada may be headed a step further, engaging in acquisition talks with Columbia Pipeline Group Inc., a company with a direct route into the U. S.’s prolific Marcellus shale play. The efforts come as gas stockpiles have reached historic highs, driving prices down almost 40 per cent since the end of 2011 and turning the fuel into the worst performer in the Bloomberg Commodity Index so far this year. That’s spurring a desper- ate drive by U.S. drillers to expand their markets.
“There’s so much supply growth in the eastern U. S. that producers are seeking any and all outlets to get the gas to market,” Martin King, an analyst at First Energy Capital Corp. in Calgary, said in a phone interview. “It’s another obstacle for Canadian producers.”
Homegrown Canadian drillers such as Calgary-based Birchcliff Energy Ltd. and Encana Corp., are already feeling the heat. Nine years ago, supplies piped from Canada met 16 per cent of U.S. demand for natural gas. By 2014, as U.S. output rose to a record for a fourth straight year, Canadian supplies had slipped under 10 per cent.
Some Canadian producers will hurt more than others. Those who keep their costs down and sell to markets that don’t vie with supplies from the eastern U. S. will remain competitive, said Jeff Tonken, Birchcliff ’s chief executive.
Encana, one of Canada’s largest gas producers, has meanwhile said it was cutting spending this year by 55 per cent amid the slide in oil and gas prices. The company is also reducing its workforce another 20 per cent, which means that Encana will have more than halved its number of employees and contractors since 2013.
The production gap between the two countries is significant.
Last year, Canada produced about 12 billion cubic feet a day of gas, compared with almost 80 billion from the states. At the same time, drillers working the Montney shale basin in Western Canada face a disadvantage with the northern edge of the Marcellus basin in Pennsylvania sitting about 12 times closer to Toronto.
The region covering the Marcellus is one of the few places where it’s still profitable to invest in gas lines. It’ ll yield 17.4 billion cubic feet a day this month, 2 billion cubic feet more than the U. S. Energy Information Administration had previously forecast. While the number of drilling rigs targeting gas has plunged to zero in fields from North Dakota to Oklahoma, there are still 40 running in the Marcellus and its neighbouring Utica shale.
That’s where proposals like Spectra’s Nexus and Atlantic Bridge projects come in. The pipelines, scheduled to start up by the end of next year, would carry about 1.6 billion cubic feet of gas, or enough to heat 22,000 homes for a year, to the northern U.S. and Canada. To achieve this, the company is seeking to reverse the Maritimes & Northeast line, which sends gas from Canada’s eastern waters south of the border.
At the same time, Energy Transfer’s Rover project would deliver the fuel to the northern Midwest, where it will interconnect with a line stretching into Ontario.
Meanwhile, Trans Canada, the company that was stymied in its attempt to build the Keystone XL oil pipeline, is considering reversing its Iroquois gas line, which has been sending Western Canadian supplies to the U.S. for more than two decades. The move would allow Trans Canada to boost volumes on the pipeline by delivering cheap Marcellus gas to the Eastern provinces.
On Thursday, Trans Canada confirmed it was in negotiations about a “potential transaction” with another company, but wouldn’t identify it. Sources said the company was Columbia Pipeline, and that the discussions are now at a standstill.
“There’s no question that more supply is hitting the market,” said Samir Kayande, an analyst at RS Energy Group in Calgary. “No matter where it comes from, it’s going to lower prices for everyone.”