Alberta Gas: Can growing local demand support prices while we wait for LNG?

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Oil and Gas Pipes

Higher demand and lower prices

There is a significant trend of increasing demand for natural gas in Alberta that is driven by oil sands development and electricity generation. Growing local demand has helped soak up some of Alberta’s ample gas supply. Unfortunately, it hasn’t been enough to stop the recent trend towards lower prices.

Lower gas prices have benefitted consumers, lowered oil sands operating costs, and helped reduce Alberta’s electricity emissions. Global market access is on the horizon and is key to accelerating natural gas development in Western Canada.

Drivers of Alberta gas demand – Steam and power

Overall growth of domestic gas consumption has been significant, with total consumption increasing from 4.34 BCF/day in 2010 to 6.06 BCF/day in 2018. Consumption of natural gas in Alberta accounted for 55% of total production in 2018. This compares to 38% in 2010. Alberta now consumes more gas than it exports. The drivers of growth have been oil sands expansion and electricity generation. Other uses of natural gas, including residential and commercial heating demands, represent a much smaller portion of total demand and have grown at lower rates. The Alberta Energy Regulator (AER) forecasts that total demand for natural gas will grow by an average of 2 percent from 2019 to 2028.

Alberta marketable gas removals and demand by sector

Alberta marketable gas removals and demand by sector graph
Source: Alberta Energy Regulator

Alberta gas exports

The wedge of remaining gas exported, and not consumed, is shown as the Removals layer in the plot above. BC gas volumes have grown (not shown), with current BC gas production of approximately 5 BCF/day. Most BC gas is exported through Alberta. Combined AB and BC gas production, estimated by the National Energy Board to be 15.8 BCF/day in July 2019, has filled current gas takeaway capacity. This has created significant price volatility, notably when pipeline maintenance restricts capacity.

Oil sands – The end of curtailment and resumption of growth

The AER forecasts continued growth of natural gas demand from oil sands, increasing from 1.93 BCF/day in 2018 to 2.98 BCF/day in 2028. This growth can only materialize if additional capacity to move oil to market is created. With uncertainty surrounding the three major pipeline projects (Line 3, TMX, and Keystone XL), future growth and the associated gas needs could be restricted. On the other hand, lower natural gas prices reduce oil sands operating costs. This helps oil sands operators stay competitive despite transportation bottlenecks, and helps mitigate the added cost of moving crude by rail.

Electricity – A transition under review

The new Alberta provincial government has made changes to the electricity market that will affect the incentives in place for building new capacity. Further changes are under consideration. This could have an impact on coal-to-gas conversion plans and the development of renewable energy generation capacity (notably wind power). It’s also important to recognize that regardless of provincial policy changes, there are federal rules in place that will impact coal power plants in 2030 and beyond. With low natural gas prices, and consideration of the public commitments made by power plant operators, the coal-to-gas transition will almost certainly continue. The AER forecasts electricity generation demand for natural gas will increase from 1.22 BCF/day in 2018 to 1.61 BCF/day in 2028.

Meeting the needs of the future

Abundant natural gas has benefitted consumers, supported competitive oil sands development and helped reduce Alberta’s electricity emissions by fueling the transition away from coal.

Recent prices have been painful for natural gas producers, but the future is bright. Domestic consumption is growing. Near-term plans are in motion by major gas pipeline operators to remove bottlenecks and improve capacity to move gas throughout North America. In the longer term, gaining access to international markets through LNG development represents a significant growth opportunity.