Prospective Role of Canada in Meeting U.S. Natural Gas Demand
- Frank Puziene (Foster Assocs. Inc.)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- March 1987
- Document Type
- Journal Paper
- 369 - 374
- 1987. Society of Petroleum Engineers
- 7.2.1 Risk, Uncertainty and Risk Assessment, 4.6 Natural Gas, 7.4.4 Energy Policy and Regulation, 4.2 Pipelines, Flowlines and Risers
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Summary. This paper reviews recent regulatory and market developments affecting U.S./Canadian natural gas import/export transactions and examines the prospective role of Canadian natural gas as a supply source for U.S. markets. It is argued that imports of natural gas from Canada will provide both an increasingly important supply source for markets in the continental U.S. and strong competition for U.S. gas producers.
Canadian exports of natural gas to the U.S. constitute an important trade for both nations. In 1984. U.S. imports of Canadian natural gas accounted for 31% of Canada's total natural gas sales and provided slightly more than 4% of the natural gas consumed in the U.S. For the Pacific northwest. California, and Great Lakes markets, Canadian natural gas accounts for a substantial portion of total natural gas use. Recent changes in regulatory policies in both the U.S. and Canada, as well as the outlook for Canadian natural gas supply, suggest that Canada well likely become an increasingly important, and competitive, supplier to U.S. markets. Specifically, estimates of the future deliverability of Canadian reserves indicate a sizable excess over projected domestic requirements and hence increased volumes available for export. The procompetitive regulatory policies currently being implemented in the U.S. and Canada should facilitate increased imports of competitively priced Canadian natural gas.
Canadian Natural Gas Export Policy
Canada's policy on natural gas exports has been strongly influenced by its domestic energy policies, which in turn have reflected conditions in world energy markets. The overall guidelines for its export policy, however, have remained stable. The Natl. Energy Board (NEB), established in 1959 to ensure federal control over interprovincial pipeline operations and exports of hydrocarbons, is charged with ensuring that (1) volumes authorized for export are surplus to present and reasonably foreseeable future domestic requirements, accounting for trends in natural gas discoveries in Canada, and (2) the price charged for exported gas is just and reasonable in relation to the public interest. In the 1970's, Canada pursued a policy of energy self-sufficiency, which encouraged domestic use of natural gain lieu of imported oil and, because of concern over natural gas supply/demand trends in Canada, discouraged any increase in authorized export volumes. By the early 1980's, however, concern over the domestic Canadian supply/demand balance began to fade as discoveries and deliverability outpaced consumption (see Table 1). Beginning in 1981, the NEB significantly increased the volumes authorized for export to U.S. markets. This increase in available exports, however, occurred just as U.S. markets. This increase in available period of excess supply. As a consequence, U.S. imports of Canadian gas declined by 24% between 1979 and 1984, although available volumes increased by 57% during the same period (see Table 2). Much of the decline in imports of Canadian natural gas during this period is attributable to its relatively high price (see Table 3). From 1976 to 1984, the NEB maintained a uniform international border price for gas exports based on the notion of substitution value, which related the export price to the cost to Canadians of using imported oil. Between 1977 and April 1981, the border price rose from $2.16/MMBtu [$2.05/GJ] to its peak of $4.94/MMBtu [$4.68/GJ], where it remained until April 1983. The U.S. natural gas surplus, which began in 1981 and increased rapidly thereafter, coupled with the decline in world oil prices, put downward pressure on natural gas prices in the contiguous 48 states as consumers switched to alternative fuels or began participating in the quickly growing gas spot market. The fast-paced developments in U.S. markets taxed the NEB's ability to establish a uniform border price that would maintain the price competitiveness of Canadian exports. In April 1983, the border price was lowered to $4.40/MMBtu [$4.17/GJ]. Then in July 1983, the volume-related incentive pricing program, under which exports in excess of a base level (generally 50% of authorized volumes) were priced at $3.40/MMBtu [$3.22/GJ], was begun. In Nov. 1984, following the U.S. Economic Regulatory Admin.'s (ERA) introduction of new natural gas import guidelines, the NEB relinquished its attempt to set a uniform border price and allowed prices to be established by negotiation between buyer and seller, but subject to a price floor equal to the Toronto wholesale price. At about the same time, the NEB also began to allow short-term exports so that Canadian suppliers could participate in the U.S. spot market. The most recent changes in Canada's export policy continue the trend toward a more flexible approach to both price and volume terms and reflect the growing deregulation taking place in U.S. natural gas markets, as well as a major revision in Canada's domestic natural gas policy.
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