Canadian Energy Futures - March 4, 2014
Presentation to the
CERI 2014 Natural Gas Conference
March 4, 2014
Gaétan Caron, Chair and CEO
National Energy Board
Slide 1 speaking notes (click to view)
Thank you for the opportunity to speak with you today.
I will start my presentation with a brief overview of the National Energy Board so that you can better understand the perspective that I am bringing to today’s discussion.
I will then highlight some findings from the Board’s research, particularly our flagship information product: the Energy Futures report.
Since we are all gathered here to talk about natural gas, I will spend some extra time discussing the NEB’s Canadian natural gas outlook.
I will conclude with a few comments about two timely, natural gas-related issues: pipeline safety and propane.
Slide 2 speaking notes (click to view)
Established in 1959, the NEB is charged with regulating pipelines, power lines, energy development, and trade in the Canadian public interest. This includes:
- Construction and operation of interprovincial and international oil and gas pipelines, international power lines and designated interprovincial power lines;
- Tolls and tariffs for pipelines under the NEB’s jurisdiction;
- Exports of natural gas, oil, and electricity, as well as imports of natural gas; and
- Oil and gas exploration and development in frontier lands and offshore areas not covered by provincial or federal management agreements.
The Board is independent. We operate within a mandate set by Parliament but at arm’s-length from government. Our role is to implement - not set - policies affirmed by legislation and regulation. The Board is also a quasi-judicial tribunal, which means that it operates like a court and must be transparent and fair.
When making decisions, the Board must balance and integrate all relevant social, economic and environmental considerations. This includes evidence related to:
- Design and safety;
- Environmental protection;
- Socio-economic matters;
- Impact on Aboriginal interests;
- Impact on landowners;
- Economic feasibility; and
- Any other public interest that, in the Board’s opinion, may be affected.
Attention is often focused on the NEB’s review of projects’ initial applications, but we regulate over the full life-cycle of projects. When they are built, we inspect. When they are operated, we inspect and audit. When a pipeline reaches the end of its usefulness, we review applications to ensure that it is abandoned responsibly.
The NEB will not hesitate to use our full compliance and enforcement toolkit - which includes inspections, audits, orders, monetary penalties, and criminal prosecution - to protect the health and safety of Canadians and the environment.
- Provides objective, comprehensive, and expert analysis.
- Serves as a reference for energy discussions among stakeholders, decision-makers, and the public.
- Includes projections of energy supply and demand for all commodities and all provinces and territories.
- Latest release: November 2013
Slide 3 speaking notes (click to view)
In support of its regulatory role, the Board monitors energy markets and produces various energy reports, including assessments of resource deposits, deliverability studies, and short-term outlooks. We also publish various energy related statistics on our website.
The Board’s flagship information product is the Energy Futures Report, which has been published in some form since 1967. This report provides objective, comprehensive, and expert analysis that serves as a reference for energy discussions among stakeholders, decision-makers, and the public. It includes projections of energy supply and demand for all commodities and all provinces and territories.
The latest release of the Energy Futures report was in November 2013, and I will now outline some of its findings.
"Canada’s vast energy resources are large enough to meet Canadian needs for many generations"
Slide 4 speaking notes (click to view)
I want to begin by highlighting that Canada’s vast energy resources are large enough to meet Canadian needs for many generations. For crude oil and natural gas, the size of the resource is able to accommodate Canadian energy needs, and serve export markets, for generations to come. Canada also benefits from abundant hydroelectric resources, which account for a majority of Canadian electricity production.
As shown in the figure, Canadian energy production is expected to grow substantially over the foreseeable future:
- Shown in red, oil production grows the most significantly, and by 2035 is nearly 80 per cent higher than current levels.
- Natural gas production, in blue, continues its current decline as prices remain too low to encourage drilling in emerging plays that will offset production declines in older wells. However, steadily rising prices and assumed LNG exports begin to increase production in 2019, ultimately reaching a point in 2035 that is 25 per cent higher than current levels.
- Canadian electricity generation increases steadily by 27 per cent over the course of the projection.
"Hydrocarbons continue to be the main source of energy for heat, transport, and many other functions that are integral to Canadians’ standard of living"
Slide 5 speaking notes (click to view)
While Canadian energy supply is expected to grow substantially during the projection, energy demand grows at a slower rate than in the past, especially in the residential, commercial and transportation sectors. Only demand in the industrial sector grows more quickly than in the past, due to growth in some energy-intensive industries.
Hydrocarbons continue to be the main source of energy for heating homes and businesses, transporting people and goods, and many other functions integral to Canadians’ standard of living. While emerging technologies such as solar hot water heating and electric vehicles are expected to continue gaining market share, demand in Canada for oil products and natural gas grows by nearly 30 per cent over the projection.
"By 2035, the energy used per unit of economic output is projected to be 20% lower than in 2012"
Slide 6 speaking notes (click to view)
A large part of the slowing demand growth mentioned previously is due to improving energy efficiency. By 2035, the energy used per unit of Canadian economic output is projected to be 20 per cent lower than in 2012.
One notable change in energy consumption trends is in passenger transport. Although the transportation sector as a whole is expected to grow annually at 0.8 per cent due to steady growth in freight transport, passenger transport is expected to decline an average of 0.6 per cent per year. This projected change in trend is largely due to the enactment of federal light duty vehicle emission regulations, which took effect in 2012 and are expected to improve fuel efficiency. Demographics and changing consumer preferences in the passenger vehicle market are also contributing factors.
"Canada will have more than enough energy to meet its growing needs, with significant amounts available for export"
Slide 7 speaking notes (click to view)
The projections for substantial growth in energy production and slowing growth in energy consumption imply that Canada will have more than enough energy to meet its growing needs, with significant amounts available for export.
In fact, on a combined basis, net crude oil, natural gas, and electricity available for export nearly double over the course of the projection. Much of that increase is in oil given the substantial increase in heavy oil production and relatively modest increases in oil consumption.
In the NEB’s Energy Futures work, foreign markets are assumed to be able to absorb all Canadian exports and the infrastructure needed to access those markets is assumed to be in place. These factors are key uncertainties to the projections that I just discussed, as they are highly dependent on economic conditions and regulatory decisions - both domestically and abroad.
I will now turn to the NEB’s natural gas projections, which will be the focus of the remainder of my presentation.
Energy Futures Assumed LNG Exports
1 Bcf/d in 2019
2 Bcf/d in 2021
3 Bcf/d in 2023
Slide 8 speaking notes (click to view)
As you know, the North American natural gas supply curve has changed greatly due to significant amounts of shale and tight gas being produced at relatively low prices.
Some of these shale gas plays (e.g. Marcellus) are located near large consumer markets. As a result, flow patterns have shifted, with less WCSB now finding its way to Ontario and the U.S. Northeast.
In addition, low prices in North America have driven interest in LNG exports. The Energy Futures report assumes LNG exports of 1 Bcf/d starting in 2019, increasing to 3 Bcf/d by 2023. The eventual volume of LNG exports may be higher or lower due to uncertainties such as North American natural gas prices, competition from other LNG supply basins, LNG demand growth, and the ability of Canadian LNG exporters to secure contracts.
This slide depicts total Canadian natural gas production in the three price cases found in the Energy Futures report: a Reference Case, a High Price Case, and a Low Price Case. The three cases model the impact of different oil and natural gas prices on production, consumption, and the wider economy. The LNG assumption is the same in all three cases.
In the Reference Case, production continues its declining trend as continued low prices limit production growth in many plays. However, as prices (and presumably, LNG exports) gradually increase, production also begins to increase by 2019. By 2035, gas production is at 18 Bcf/d, or 25 per cent above current levels. In the High Price Case, production begins to increase earlier in reaction to higher prices. The impact is the reverse in the Low Price Case, with production not increasing until after 2020.
Slide 9 speaking notes (click to view)
This slide provides more insight into the Energy Futures report’s natural gas production projections for the Reference Case. The Montney play contributes the most to Canadian supply, nearly 8 Bcf/d by 2035. The rapid growth in the Montney is largely due to its low production costs, which make the basin economic even at the relatively low prices in the Reference Case. In addition, the Montney benefits from relatively high natural gas liquids content, which fetches a higher price than dry natural gas. There is also a relatively large amount of pipeline infrastructure already in place in the area, which allows Montney gas to easily reach markets.
Other emerging plays, like Horn River, Cordova, Liard, and Duvernay also contribute to supply growth, but not to the extent of the Montney. Some of these plays, such as Horn River, lack the extra economic boost that comes from natural gas liquids. Others are still in the early stages of development. As more information on these plays becomes available, their production could be higher in upcoming Energy Futures projections.
Conventional gas production continues its steady decline over the projection, as relatively low gas prices result in limited activity in conventional areas.
Within this context, I’d like to highlight another important report that the Board, along with its regulatory counterparts in B.C. and Alberta, and the B.C. Ministry of Natural Gas Development, released in November 2013: a resource assessment of the Montney formation. The study indicates that the Montney formation is one of the largest gas resources in the world, with marketable resources of 12,719 billion m³ (449 Tcf). At current consumption rates, the Montney gas resource would meet Canadian needs for 145 years.
Slide 10 speaking notes (click to view)
Here is a map of the natural gas plays in Western Canada that gives you an idea of their location and extent.
"On the demand side, natural gas is the fastest growing fuel in the projections"
Slide 11 speaking notes (click to view)
On the demand side, natural gas is the fastest growing fuel in the projections. A large part of this is due to movement from coal-fired power generation to natural gas powered generation, which is itself due to:
- The relatively low price of natural gas in the projections
- Recently enacted coal regulations by the federal government
- Efforts by Ontario to phase out coal.
In addition, low natural gas prices relative to oil prices are expected to encourage modest penetration of natural gas vehicles (NGVs). In the projections, freight NGVs use about 260 MMcf/d of natural gas in 2035, representing six per cent of total freight and approximately 60,000 medium- and heavy-duty freight NGVs. While LNG-powered trucking is in its early stages now, this could be an area of growth beyond what we have in our projections and could displace significant amounts of diesel consumption.
Another source of gas demand is the oil sands. Natural gas consumed in the oil sands increases over the projection along with oils sands production, but gas intensity declines by 0.5 per cent over the projection.
Before I finish, I would like to mention two other issues related to natural gas: pipeline safety and propane.
Slide 12 speaking notes (click to view)
Natural gas uses pipelines to reach markets and the NEB takes every opportunity to verify that the pipelines we regulate are operating safely. We require all pipeline companies to anticipate, prevent, manage, and mitigate potentially dangerous conditions associated with their pipelines. All incidents are preventable and we expect the companies we regulate to strive for zero incidents. Equally important is our commitment to maintaining an open dialogue with Canadians.
In an effort to advance discussions on safety and environmental protection, the NEB held a Safety Forum this past June. During this event, a broad consensus emerged that:
- Industry must strengthen public trust in its ability to operate safely.
- A target of zero incidents is achievable but requires commitment to building and maintaining a culture of safety and implementing effective management systems.
- Corporate leaders are responsible for building and maintaining a culture of safety in their organizations.
- Transparency is a cornerstone of public trust and the public should be involved in identifying what information should be public.
- Safety must be defined broadly to include environmental protection and process safety, which focuses on preventing catastrophic incidents.
In concert with the Canada-Newfoundland and Labrador Offshore Petroleum Board and the Canada-Nova Scotia Offshore Petroleum Board, the NEB released a consultation paper in October 2013 containing a draft safety culture framework. This paper was designed to improve understanding of the influence of culture on safety and environmental protection. The public comment period for the paper ended on January 30th, 2014, and feedback was received from industry, individuals, and various other stakeholders. This feedback is currently being reviewed.
Safety and environmental protection are improving under our watch. The volume of hydrocarbons released by pipelines into the environment is down significantly, from 495 m³ in 2009 to 28.9 m³ in 2013. In 2013, nearly all liquid releases from NEB regulated energy facilities have been fully remediated, with exceptions only where cleanup is underway. Also, the NEB received funding in 2012 to increase inspections by 50% and double the number of comprehensive audits. From April 1, 2012 to March 31, 2013, we conducted 182 inspections, exceeding our target, and conducted the expected number of audits.
The facilities we regulate are safe and the environment in which they operate is well protected. At the same time, we are Canada’s energy watchdog and our work is never finished. We strive to continually improve.
Slide 13 speaking notes (click to view)
Lastly, I would like to say a few words about propane.
As some of you may know, the Ministers of Natural Resources and Industry sent a letter on February 4, 2014 requesting that the NEB and the Competition Bureau work together to review propane market issues, including current supplies and factors that may have contributed to price increases and supply challenges this winter. The review will culminate in a Final Report that will be published publicly before April 30, 2014.
Since our work on the report is ongoing, I will not speculate on its contents. What I can say is that we have received a clear mandate from the Ministers and will be responsive to the request within the identified time frame.
National Energy Board
444 Seventh Avenue SW
Slide 14 speaking notes (click to view)
I hope you have enjoyed this quick overview of the NEB and some of its work. To recap:
- We project total Canadian energy production to grow substantially and total Canadian energy use to grow moderately, which will leave substantial energy available for export.
- We project both natural gas prices and LNG exports to climb in the mid-to-long term, with the Montney play contributing most to future Canadian supply.
- On the demand side, we project natural gas to be the fastest growing fuel due largely to movement from coal to natural gas power generation.
In addition, the Board remains focused on pipeline safety and is also working to better understand propane market fluctuations.
For a copy of this presentation, the Energy Futures report, the Montney Report, or any other NEB products and information, please contact us or visit our website at www.neb-one.gc.ca.
Thank you for giving me this opportunity to speak with you today. I look forward to your questions.
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