Natural Gas Liquids: Canadian Supply And Demand Prospects In The 1990s

Abstract

Introduction After a decade of major capacity expansions in natural gas processing, the Western Canadian natural gas liquids (NGLs) sector faces an uncertain future. Riding on the buoyant prospects for natural gas exports, the NGLs production will peak in the 1990s; the uncertainty is in NGLs demand. NGLs may be used in miscible flooding schemes for enhanced oil recovery, as diluents for the pipelining of heavy oil and bitumen, as petrochemical feedstocks and directly as fuel or in blends with other fuels. Western Canada ought to be poised for significant expansions in most petroleum and petrochemical sectors. Therefore, the NGLs demand prospects in the 1990s ought to be good. However, with unpredictable world oil prices such expansion plans may recede into the next century, leaving western Canada awash in surplus NGLs. With the help of two models developed at the Alberta Research Council, this paper examines the Western Canadian NGLs prospects in the 1990s. The two models are a continental natural gas model (AGAS) and a Canadian liquid fuels model (ALF01). Natural Gas Model Description AGAS is an optimizing, multi-period, clairvoyant energy supply demand model. Because of its large size, linear programming is the only practical optimization technique. A linear programming model simulates a perfect market economy, which maximizes the sum of the producer and consumer surpluses. While it can only approximate reality, the solution represents an upper bound on what the energy sector can achieve, provided that the proper policy and economic choices are taken. By taking ‘snapshots’ of the energy sector of the economy at various time intervals, we can trace its behavior over time. Normally, the model has a 24-year time horizon, covering 8 time periods of 3 years each. All investment and production decisions are solved simultaneously over time; thus the model has perfect foresight. While this knowledge is never completely available, the model permits us to test various scenarios involving different perceptions of future developments. AGAS is a partial equilibrium model for natural gas supply and demand in North America. Supply functions are estimated for four gas supply regions. Demand curves are specified for each time period and in each of nine consuming regions. The existing gas processing and pipeline network, with capacities and tariffs, is specified. Separate gas deliverability profiles are specified for each producing region. Policy constraints, such as export and import limits, reserve or deliverability tests, can be incorporated into the model. Investment decisions, including the development of new gas supplies and the building of new gas processing plants and pipelines, the level of production of gas from each producing region for each time period, the capacity utilization level of existing facilities, the level of consumption of gas in each consuming region, the city gate price for gas in each consuming region — all these are determined endogenously. The model seeks that development and production profile of the natural gas industry in North America that maximizes the present value of the sum of consumer and producer surpluses generated over the time horizon of the model.