Update on Canadian Gas

Presented by
Roland George
roland.george@neb-one.gc.ca
Board Member
National Energy Board

13^th Wyoming Natural Gas Fair
Jackson Hole, Wyoming

17 September 2009

First, I'd like to thank the organizers for asking me again to say a few words at this great conference in one of my favorite places.

Over the decades, I've worked in the natural gas industry as a gas utility guy, a researcher, a consultant and now with Canada's national energy regulator, with a broader energy sector focus.

Today, I'm going to give you an update on Canadian gas with that broader national energy regulator focus.

Outline

My outline for today:

• An introduction to the NEB for those of you who may not know us well.
• Recently released update to Reference Case Outlook (July 2009), based on 2007 report on Canada's Energy Future.

My remarks will focus on issues mainly related to gas.

Today, the NEB is releasing its update to its last Short-term Natural Gas Deliverability report; the full report is switching to a March release, instead of October, in order to allow better utilization of company budgeting data.

This will be followed in October by a report on the changes and challenges for Canadian infrastructure based on our updated 2009 Reference Case.

As you can see fromthe above, the NEB is quite active on its mandate to inform the public on energy matters.

What is the NEB?

• We are the federal agency that regulates international and interprovincial pipelines and international power lines under the NEB Act.
• In many ways, we are similar to the FERC and to the Office of Pipeline Safety.
• Under other federal legislation, we are also the upstream regulator for the offshore and northern Canada oil & gas exploration and development activities (under non-Accord lands).

In summary, our purpose is to promote safety and security, environmental protection and efficient energy infrastructure and markets in the Canadian public interest. And when considering public interest the Board will usually take into consideration the fact that energy development must be sustainable with regard to environmental, economic and social factors.

Why is the NEB relevant to the U.S.? Simply put, it's because Canada is the largest energy supplier to the U.S. We are the largest supplier of oil, gas and electricity to your country. We are strong allies. We have a large resource base. We are next door. We share many values such as a belief in open & competitive markets. Although we have independent regulatory regimes in the two countries, they are compatible. These are important considerations in an uncertain and security conscious world.

Our Board Members

National Energy Board

• 7 full time members
• 4 temporary members
• about 350 staff
• mainly located in Calgary
• decisions are based on knowledge:
  • that we bring with us
  • that people share with us during our hearings
  • decisions made are intended to serve the Canadian public interest, which we define as inclusive of all Canadians and refers to a balance of economic, environmental and social interests that changes as society's values and preferences evolve over time. As a regulator, the Board weighs the relevant impacts on these interests when making its decisions.

Energy Future Update

The Energy Future Report is

• a long-term assessment of energy demand and supply in Canada
• released at roughly four year intervals, the last one in 2007
• provides an opportunity to integrate the short term market intelligence [various commodity-specific Energy Market Assessments (EMAs)]
• an "all energy" market analysis and outlook.

In July 2009, we published an update to the reference case from the 2007 report, which extended its outlook to 2020

• update was necessitated by the high degree of change in energy world in a short 2-year time frame
• objectives of the 2009 update report:
  • Independent analysis on energy supply and demand trends
  • Reference on energy issues and trends
  • Provide stimulus for energy discussions
  • Informs decision makers of key risks and uncertainties facing the energy future

2009 Reference Case Scenario: Canadian Energy Demand and Supply to 2020 - An Energy Market Assessment is a Web release document only [no hard copy]
Covers all commodities, and updates trend changes.

I will focus on the gas portion of the story today.

Canadian Gas Production - Future supply is unconventional

The 2009 Reference Case outlook indicates that future gas supply will increasingly come from tight sands, shale and coal sources.

Canadian drilling slips sharply due to lower prices in 2009, then rebounds to a peak of 12000 in 2013 before gradually declining annually to 2020.

The production response to the revised drilling levels is shown in the graph:

• lower output to 2012 before rebounding moderately as rising shale gas and tight gas volumes increase and offset conventional production declines, a slightly more positive story than projected in the 2007 report
• wells on production prior to 2008 decline over time and are supplemented by production from new wells.
• responds to price tracks we have adopted - real $5.50, $7, $11 at Henry Hub, not the less than $3.00 we've seen recently
• Mackenzie gas is assumed to come on in 2016 (this is a projection and not a regulatory decision).
• in the long term Canada is unable to maintain current net export levels
  • more gas used in Canada [oil sands in Alberta, power generation in Ontario]
  • therefore less Canadian produced gas is available for U.S.
  • but note that LNG imports are a "wild-card" in terms of flows to the U.S. and capacity utilization of some export lines.

B.C. Montney tight gas and Horn River shale are key to sustaining supply

Roughly 250 Montney and Horn River shale wells were drilled in 2008. Activity is projected to increase to between 500 and 900 wells by 2020 (700 in the Reference Case).

The Montney contributed about 0.3 Bcf/d of production in 2008. Including Horn River shale gas, production would increase to 4.3 Bcf/d by 2020 in the Reference Case. In the High Case, production from the Montney and Horn River would be 5.4 Bcf/d by 2020, and in the Low case just 2.8 Bcf/d.

Canadian Supply / Demand

Canadian gas demand increases steadily through 2016 driven by increasing gas use for oil sands and electricity generation. Gas supply in Canada declines to 2013 before rebounding late in the decade.

"Net Exports" refers to the difference between amount produced in Canada plus amount imported into Canada minus the amount exported from Canada. Imports would include pipeline imports from the Lower 48, any Alaska pipeline deliveries and LNG.

The net effect is to reduce the volumes potentially available for export that would compete with Rockies-sourced gas in major markets. Net Canadian exports are relatively flat from 2011 through to 2020. In the longer term, net exports mainly decline after that.

Annually, we also publish a short-term look at natural gas deliverability:

• 3 year outlook
• Was previously published in October but now switched to March timeframe
• Update report for transition period is out as of today (see NEB web-site)
• Concludes that Canadian deliverability will decline in 2009 and 2010 [by average volumes of 1.3 Bcf/d in 2009 and by 1 Bcf/d in 2010], potential stabilization in 2011, and
• Canadian deliverability more than sufficient to meet Canadian demand, but net exports down by 1.6 Bcf/d in 2009, 1.2 Bcf/d in 2010 and .6 Bcf/d in 2011, a total of 3.4 Bcf/d in the 2008 to 2011 timeframe.

Ultimate Potential: Conventional Natural Gas

Legend: D=discovered - P=produced.

On the positive side, Canada is blessed with a large conventional natural gas resource base.

The total conventional potential for Canada is 520 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. However, much of this gas is in the far north or offshore where no transportation is available today (orange are the developed basins, yellow is the undeveloped basins)

Note: Ultimate potential is an estimate of all resources that may become marketable having regard for geological prospects, known technology and economics.

Other Supply Sources

Other supply sources are available to us (LNG and unconventional gases). Although Canada includes tight gas in the conventional category, for our purposes today, we will call them unconventional.

Canaport facilities in Saint John New Brunswick is now open (1^st cargo delivered in June 2009, picture above), capacity is 500 MMcf/d and it is connected to U.S. NE markets via the Emera Pipeline and M &NP Pipeline.

Canada's unconventional gas potential is just starting to be developed (CBM, shale gas, tight gas, & gas hydrates). CBM production is now eight years old, total production is up to about 700 MMcf/d, marketable resources estimates are: 34 Tcf with a range from 25 to 49 Tcf. Shale gas experimentation is underway in Horn River Basin in northeast British Columbia, Colorado Shales in Alberta, Utica Shale in Quebec, and the Horton Group in New Brunswick and Nova Scotia. Initial estimates of marketable resources are: 82 Tcf, with a range from 46 to 140 Tcf. Some tight gas resources are already considered in the conventional estimates, but the NEB recognizes that additional resources may be present in the Western Canada Sedimentary Basin (WCSB), and estimates an additional marketable volume of: 71 Tcf, with a range from 0 to 216 Tcf. Hydrates are seen as a future resource, although testing has been done on several occasions in the Beaufort region. Transportation and economics remain as issues. There are extremely high estimates of gas in place associated with gas hydrates with orders of magnitude higher than the other gas sources combined. How much of that volume will be commercially recoverable is still speculative.

Infrastructure Changes and Challenges EMA - Key Messages

Our Infrastructure Energy Market Assessment is expected to be released in October 2009, and it logically follows the Reference Case Outlook.

This report covers crude oil, natural gas, natural gas liquids & electricity.

Key gas related issues are:

• Canadian gas infrastructure is well developed, but flows to east & south are declining even with development of unconventional supply.
• Markets in eastern Canada and the U.S. Northeast continue to grow. Need for new infrastructure to access Rockies gas, Mid-continent shale gas or LNG imports from Gulf Coast.
• Canadian gas market is evolving as Ontario demands increase (for power generation needs) and Alberta demand increases (for oil sands development).
• WCSB supply declines, it may not be able to meet Canadian needs and all U.S. export needs in the future.

Infrastructure Changes and Challenges - Summary of Possible Changes to 2020 (Natural Gas Only)

Note: Mackenzie Pipeline is contingent upon regulatory approval being given and construction completed.

Regional infrastructure needs for Canadian gas are explained in the infrastructure Energy Market Assessment.

It is important to note that gas flows can be bi-directional and that flow patterns are subject to change as markets evolve and as supply sources changes. In North America, it is necessary to think of gas markets in all 3 countries as one large integrated market where changes in one area have impacts on other areas.

Discussion Points - Rockies Gas

Expectations of flat to declining gas production in Canada and growing Canadian gas demand for oil sands extraction and processing and for electricity generation creates some potential headroom in markets served by Canadian exports and indicates an opportunity for increased delivery of Rockies gas to the east. The growing Ontario demand in Canada represents a future market where Rockies gas could make gains as WCSB is challenged on the supply side.

Supply potential in the Rockies (200 Tcf according to the Potential Gas Committee) suggests that REX, now nearing full completion is still just a first step. Further compression and looping may follow as markets grow. With enough market growth, there could be room for another large pipeline to the east and/or growing connections to the West.

However, growing shale gas supply in Texas and Louisiana will be competing for those same markets. Marcellus shale gas, given its proximity to those same markets would be an additional competitor for Rockies gas, although it is still early for the Marcellus developments.

With the significant recent gains in gas supply from US sources as noted by the updated Potential Gas Committee report released in June, there have to be questions about how long North American gas supply can continue to grow. What is the next supply source for North America? Northern gas, gas hydrates, LNG?

Summary

Thank You!