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Home > Speeches and Presentations > Speeches and Presentations 2007 > Canada's Energy Future - Focus on Natural Gas

Canada's Energy Future - Focus on Natural Gas

Presented by
Roland R. George
Board Member
National Energy Board

Natural Gas in North America: Markets and Security
Baker Institute and Center for Energy Economics, Houston, Texas

16 November 2007

About the Presentation

The National Energy Board has a mandate to monitor the outlook of energy supply and demand in Canadian markets and provide Canadians with energy information. This is the purpose of the report on Canada's Energy Future.

The Report is a comprehensive energy supply and demand outlook for the years 2005 to 2030. We have been conducting these studies since 1967 on roughly a four year frequency. The current edition, consist of a reference case analysis from 2005-2015 and an analysis of three scenarios, which extend out to the year 2030.

The key objectives of the report are as given in this chart.

• to provide Canadians with unbiased, relevant, comprehensive, expert analysis on energy supply, demand and its economic and environmental implications, which serves as a reference for Canadians;
• to provide discussion with and amongst stakeholders, both during and after the completion of the report on emerging issues of national importance;
• and to inform decision makers of key risks and uncertainties facing the energy future and advise them of regulatory and other issues that need to be addressed.

It is important to underline the amount of consultation that went into the development of this report. We consulted with over 250 Energy experts and held two across Canada consultations with representatives from industry, provincial and federal government, academia, NGOs, First Nations and Interested Canadians. Much of this information is available to Canadians on this Web site.

With this information and our own analysis and understanding, we use a series of economic and geological models to develop quantitative projections of energy supply and demand in Canada.

Presentation Structure

Key Assumptions

Reference Case & Scenarios

The 2007 EF report includes a reference case and scenarios. This approach should appeal to the needs of a wide group of stakeholders. The Reference Case analysis is undertaken for only the short to medium timeframe. Overall, certainty is inversely related to time, with the immediate future holding greater certainty than the distant future. As such, the Reference Case, if defined as the most likely case, is most meaningful in the short term. The word “scenario” itself reflects uncertainty and therefore these are more meaningful in the longer term.

• The reference case outlook period is from 2005 to 2015. It is characterized by moderate energy prices and business as usual developments. Natural gas prices are assumed to follow a traditional relationship with crude oil.
• Continuing trends is characterized by little change from the business as usual trends. Canada continues to experience rapid economic growth and energy prices begin to moderate. This scenario extends the reference case projection out another 15 years to 2030.
• Triple E scenario has more moderate economic growth as a result of assumed economic/environmental trade-offs. By 2030, this scenario has the lowest energy prices. These low prices are achieved through a cooperative global environment that results in abundant energy supplies around the world, as well as energy demand and emissions management programs, which slow energy demand growth. The globally cooperative nature of this scenario allows for the rapid development of significant LNG infrastructure, which will be discussed in more detail. The intersection of high energy supply and slower energy demand create the low price environment. The low price environment means less oil and gas production within Canada.
• The Fortified Islands scenario has the slowest economic growth and highest energy prices. These outcomes are a result of a security conscious world. Continued geopolitical tensions limit access to cheap global energy supplies. Higher cost energy sources are available from secure countries but drive energy prices up. Canadian oil and gas production benefits from the high price environment. Overall, Canadian energy demand is lowest in this scenario because of high energy prices and slower economic growth.

Scenarios are:

The scenarios were developed with Canadian energy stakeholders during consultations sessions.

Crude Oil & Natural Gas Prices

Energy Prices

• Crude oil prices range from $35 to $85 per barrel (WTI, 2005 US dollars). In the Reference Case, energy prices are assumed to be $50 per barrel.
• Natural gas prices range from $5.50 to $12 per mmBTU (Henry Hub, 2005 US dollars). Natural gas prices typically move in relation to crude oil prices over the long term, although usually at a slight discount on an energy-equivalent basis. Short term fluctuations in this ratio can be quite wide. In the Reference Case, the historic relationship between natural gas and crude oil continues with natural gas at 84 percent of the crude oil price, at a 6:1 energy content parity. This relationship is assumed to hold in Continuing Trends and Fortified Islands, as well. However, in the Triple E scenario, it assumed that natural gas trades at a premium due to the fact that it is the cleanest burning fossil fuel. As such, natural gas is priced at 94 percent of the equivalent crude oil price on an energy-equivalent basis.
• Energy prices are higher than they have been historically across all scenarios.
• In two of the scenarios there will be a decline in price compared to what Canadians are currently paying. This takes place in both the Triple E and Continuing Trends scenarios. In the Fortified Islands scenario, Canadians could expect to pay more for energy than what they are paying today.

Energy Demand

Energy Demand

Total secondary (end-use) energy demand in Canada has increased an average of 1.8 per year from 1990 to 2004. This is maintained in the Reference Case scenario, with a percent growth rate of 1.8 percent from 2004 to 2015. Despite the higher oil and gas prices in the outlook period, the expectation is that energy demand will remain robust as income and GDP continue to put upward pressure on demand for energy-related goods and services.

Energy demand will grow at a rate of between 0.3 percent and 1.4 percent, per year across the three scenarios. This is down slightly from the Reference Case which shows a growth of 1.8 percent, per year between 2004 and 2015. This is a result of slowing economic growth across all three scenarios.

Growth in energy demand ranges from 0.3 percent to 1.4 percent per year across the three scenarios. As Continuing Trends extends the Reference Case out to 2030, the same assumptions apply: continuing the trends of the recent history into the future. As the forecast progresses to 2030, however, there is a slight slowdown in Canadian economic growth, personal disposable income and population. As a result, the energy demand growth rate for the Continuing Trends scenario dips to 1.4 percent per year.

The lowest demand rate is in the Triple E scenario. This is because of the many programs to promote energy efficiencies as well as environmental influences.

In Fortified Islands, total energy demand grows at 0.7 percent per year. This scenario is characterized by slower economic growth and higher commodity prices. This supports a deceleration in total energy demand compared to Continuing Trends and to historical rates due to the dampening income and price effect.

Crude Oil

Crude Oil Supply

Total crude oil production in Canada is expected to increase in the Reference Case, as well as all three scenarios from its existing levels. However, the increase does not come from all sources.

Conventional oil production declines in the Reference Case and the three Scenarios from the current level of 1.2 million bbl/d to as low as 0.4 million bbl/d in Triple E. Production from East Coast increases from the current levels of .031 million bbl/d to 0.4 million in the Reference Case and then declines to as low as .044 million bbl/d in Triple E.

Production from Oil Sands increases through the Reference Case and Scenarios to as high as 4.9 million bbl/d in Fortified Islands.

Thus the Reference Case sees an increase in both East Coast and Oil Sands production. In the Continuing Trends, the East Coast production begins to decrease from the high levels in 2015.

Triple E sees a slowing in the growth of oil sands production , as well as deepening of the decline in the production from East Coast. This is a direct result of lower oil prices and costs of environmental measures. The lower price in this scenario discourages development on marginal plays, with noticeable impact on East Coast offshore and oil sands. This is a “dual price” scenario, where the producers see a lower price as reflected by the lower West Texas Intermediate (WTI) price, and consumers see a higher delivered price due to the CO₂ tax.

Under the Fortified Islands scenario, high oil prices and preference for indigenous sources provide a further boost to oil sands production. The decline in the East Coast production also slows down as satellite pools are developed.

The notable growth in oil sands supply assumes timely development of markets and transportation infrastructure

In response to the higher crude oil supply, there is an increase in oil exports.

Light & Heavy Oil Exports

Canada is a net exporter of crude oil and the largest supplier of crude oil to the United Sates. Although there is some expansion of refining capacity in Canada, supply outpaces domestic demand by a considerable margin, except in the TE scenario.

Total exports levels reach 3.4 MMB/d by 2030 in the CT scenario, and 4.4 MMb/d in the FI scenario.

Natural Gas

Ultimate Potential: Natural Gas

Legend: D=discovered and P=produced.

Firstly I'd like to discuss Natural Gas: throughout this presentation I'll refer to some of the work done by our Commodities Business Unit in their supply demand studies.

Canada is blessed with large natural gas reserves.

The Western Canadian Sedimentary Basin which goes from Manitoba to the southeast tip of the Yukon is Canada's largest basin. Natural gas has been produced from this region since the early 1900s (Medicine Hat used to say it had “Hell for a Basement” and was one of the first towns in North American to introduce natural gas lighting in the early 1900s).

The total potential for Canada is 577 Tcf of which about 156 Tcf has been produced. Canada currently produces 5.8 Tcf per year (of which half is exported) so we have ample potential for the future. Note however that much of this gas is in the far north or off of the Grand Banks.

Ultimate potential: an estimate of all resources that may become recoverable or marketable having regard for geological prospects and anticipated technology.

Natural Gas Supply

Price tracks are $5.50, $7 and $12.

If drilling returns to 2005-6 levels (~18,000 gas wells drilled/year), decline is along the middle track (2007 = 12,000, 2008 = 15,000).

If drilling falls back to where it was in the late-1990's (~8000 gas wells drilled/year) you get the low track.

If you boost drilling to around 25,000 gas wells/year and aggressively develop unconventional and frontier sources, you get the high.

WCSB Conventional & Unconventional

Conventional gas from western Canada is still the largest component of supply, but is in decline in all scenarios. There remains a large amount of conventional resources (134 Tcf). But on average, new conventional gas wells are less productive than those discovered previously so you get less output for the same amount of drilling effort and cost.

Western Canada unconventional gas includes coal bed methane (CBM), tight gas and shale gas. CBM production peaks at 1.6 Bcf/d in the middle and low cases and 3.5 Bcf/d in the high (2020).

Tight gas represents just over 10 percent of total production.

Shale gas represents about 1 percent of production in the Continuing Trends and Triple E scenarios. It does better in Fortified Islands to account for about 4 percent.

Frontier, Northern & LNG Imports

Through 2011, frontier production is from the east coast only.

Mackenzie gas is assumed to become available in 2014 in CT and FI. Whether this actually happens is subject to the regulatory process underway, and corporate decisions and timing that might result.

By 2017, oil production from the existing projects off Newfoundland is done and you can access the associated gas.

In Fortified Islands we include offshore Labrador, and the western Arctic.

LNG projects in Atlantic Canada, Quebec and British Columbia are at various stages of consideration. LNG imports begin in 2009 and three terminals are assumed to be operational by 2015. In Continuing Trends, a fourth terminal is added and utilization rises to stabilize at just over 2 Bcf/d.

In Triple E, imports are more than double that in Continuing Trends. By 2021 we assume 7 terminals operating and LNG imports would be almost equal to Canadian domestic gas production by 2030.

In Fortified Islands, an unstable international investment climate and reduced international trade require North America to be self sufficient in gas, with only minor amounts of LNG imports (none entering through Canada after 2015).

Supply and Demand Balance, Natural Gas - Continuing Trends

When we match up Canadian gas supply and demand, we get the potential for net gas exports Canadian gas demand is increasing in all cases.

As Canadian demand increases and domestic production decreases, net exports could be negative by the end of the forecast period.

The decline in net exports doesn't mean that export pipelines will experience significant supply loss since increases in LNG or Alaska gas transiting through Western Canada could help maintain volumes.

Supply and Demand Balance, Natural Gas - Triple E

Strong demand management programs and lower economic activity flatten demand despite lower prices.

In Triple E supply costs are reduced by focusing on lower cost conventional, unconventional and frontier sources, while augmenting supplies with imports of abundant liquefied natural gas.

Nevertheless, the reduced supply which are then reflected in decreasing net exports.

Since the U.S. market also amply supplied with additional LNG imports, a gradual reduction in Canadian natural gas exports to the U.S. would be a normal market evolution as the lowest cost option for all market participants.

Supply and Demand Balance, Natural Gas - Fortified Islands

This is the only scenario that sees production increases.

Demand growth flattens due to reduced economic activity and high prices.

Consequently, exports increase over most of the period.

GHG Emissions

Greenhouse Gas (GHG) Emissions & Intensity

Lastly. I'd like to address greenhouse gas (GHG) emissions. Our stakeholders were very interested in understanding what would be the effect of these scenarios on GHG emissions. It is important to note that we can only address emissions as it relates to energy consumption… our study did not consider the effect of agriculture or forestry carbon sinks nor did we consider any emissions trading implications. Therefore, we offer a partial analysis of Canada's GHG emissions future. To a large extent, GHG emissions are an outcome of energy demand trends, and therefore GHG emissions increase with growing demand in the Reference Case and almost all scenarios.

In the Reference Case, GHG emissions are expected to increase by 1.5 percent per year as compared to the historical rate of 1.7 percent per year.

In Continuing Trends, due to the lower economic growth and corresponding lower energy demand, the growth in GHG emissions slows down to 1.2 percent per year. This further dampens to 0.6 percent in Fortified Islands where energy prices are high encouraging energy conservation and economic growth is the lowest.

The biggest change occurs in Triple E, where we assumed a suite of policies and programs (more aggressive than those in existence to-day) directed at balancing energy use, environmental impacts and economic growth. The GHG emissions decline at 0.1 percent per year. The decline in these emissions is unprecedented in history.

If you consider GHG emissions as a percentage of GDP, you can see in all scenarios improvements are achieved, in line with the steady replacement of existing capital stock (buildings and vehicles) with more energy efficient technologies.

This decline in Triple E only partially meets the Canadian government's target of a 20 percent reduction in GHG emissions by 2020. Further changes by Canadians in lifestyle choices, more ambitious energy reduction programs, and consideration of a full spectrum of GHG reduction strategies will be needed to generate incremental reductions.

Overview Messages

I would now summarize the key results in these overview messages.

Overview Messages

Canadian energy markets are expected to function well with energy prices balancing energy supply and demand.

Energy prices are expected to remain higher than historical levels due to international demand-supply factors. In the scenarios we examined, the price of oil ranges between US $35-$85 in 2005 dollars, as compared to US$20 in 1990.

Despite the higher energy prices, the energy demand is expected to increase with growth in the economy. The pattern of energy consumption is largely predetermined by the make-up of the existing stock of energy-using devices such as buildings, appliances, cars, industrial motors. As the stock turns over, and is replaced by new and more efficient stock, the energy efficiency will improve. This is further bolstered by penetration of new technologies, which generally promote cleaner combustion. These efficiency improvements partially offset the growth in demand.

Energy demand management initiatives will also play a key role in dampening this growth.

Overview Messages

With well functioning energy markets, appropriate signals will generate ample supply of energy. Based on our study we feel that Canadians will have adequate supply to meet their needs.

Fossil fuel and conventional energy sources will continue to be the dominant source of supply. However, non-fossil fuels and non-conventional hydrocarbons will play a bigger role.

A significant example is the growing share of oil sands, which will likely require changes to refineries.

Energy exports constituted 20 percent of total Canadian exports of all goods and services in 2005. Total net exports of energy are expected to increase through the forecast period. However, the growth rates vary by energy commodity and scenario. The net exports of oil reach new heights led by the increase in oil sands production. There is also an increase in electricity exports. Natural gas exports decline dramatically in two of the three scenarios.

Overview Messages

Controlling GHG emissions resulting from the consumption of energy is the biggest challenge currently facing Canadians.

Notable improvements are being made in the way Canadians consume and produce energy. However to achieve more significant reductions in GHG emissions, Canadians would have to make important lifestyle changes as well as implement policies and programs to control the growth in the use of energy and to promote switching to cleaner fuels.

Overview Messages

The many challenges identified in the analysis can be successfully overcome. The “enablers” include technology, policy, adequate investments, public engagement and high quality analysis to facilitate timely decision making.

Technology can offer solutions to many challenges in the energy system ranging from ways to expand the boundaries of conventional resource supply to energy efficiency improvements.

Policy that integrates across multiple objectives of economic growth, environmental sustainability and development of the energy sector is another significant component. To achieve these multiple objectives the policy frameworks will need to integrate across governments and consider regional differences with respect to energy and emissions, evolving energy systems and the changing global environment.

Major investments are needed to develop new sources of energy and infrastructure to meet the growth in energy demand as well as replace the ageing infrastructure.

These investments will require public engagement and acceptance. A balance will need to be established between public acceptance and the need for timely decision making.

As energy issues become increasingly complex, requiring timely decision making, there will be a growing need for quality analysis to facilitate decision making. We hope that analysis such as those provided in this Report will be a step in this direction.

Concluding Remarks

I would now summarize the key results in these overview messages.

Concluding Remarks

The many challenges identified in the analysis can be successfully overcome. The “enablers” include technology, policy, adequate investments, public engagement and high quality analysis to facilitate timely decision making.

Technology can offer solutions to many challenges in the energy system ranging from ways to expand the boundaries of conventional resource supply to energy efficiency improvements.

Policy that integrates across multiple objectives of economic growth, environmental sustainability and development of the energy sector is another significant component. To achieve these multiple objectives the policy frameworks will need to consider wide regional differences with respect to energy and emissions, evolving energy systems and the changing global environment. These are the elements of a “smart” policy.

Major investments are needed to develop new sources of energy and infrastructure to meet the growth in energy demand as well as replace the ageing infrastructure.

These investments will require public engagement and acceptance. A balance will need to be established between public acceptance and the need for timely decision making.

As energy issues become increasingly complex, requiring timely decision making, there will be a growing need for quality analysis to facilitate decision making. We hope that analysis such as those provided in this Report will be a step in this direction.

Questions?

We will now open the session to your questions.

 

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Date Modified:

2011-10-28