Opportunities And Challenges Ahead

Abstract

Post-deregulation-A Decade of Growth The Canadian Gas Industry is about to enter its twelfth year since deregulation which commenced on November I, 1985. The past decade has been one of rapid growth for the industry. Total Canadian production will reach 5.4 Tcf in 1996, double the 1985 level of 2.7 Tcf. This growth was almost entirely due to exports, which more than tripled from 740 Bcf in 1986 to 2,810 Bcf in 1996. This growth was facilitated first by existing spare export capacity, which was used up during the late '80s, and then by two major pipeline projects. The Iroquois project to the U.S. Northeast came partially onstream in late 1991, reaching about 575 MMcf/d in 1992, followed by the massive PGT expansion commenced incremental shipments of 900 MMcf/d to markets in Southern California and the Pacific North West. With Canadian gas deregulation, the previously strict formulae based methodqlogies to protect future domestic demand were largely dropped. Today, we rely on price to ensure adequate supply. Canadian consumers have benefitted from this arrangement. The wholesale cost of gas supply (before transportation and distribution charges) under regulation averaged $2.76IMcf in Alberta from 1980 to 1985, and $ 1.72l Mcf since this time. The benefit for producers has been the volume growth described above. Although some critics have been concerned with the decrease in the Canadian reserve life from 20 plus years to 10, the U.S. has been running very nicely on an inventory of nine to 11 years for over two decades! The reserve life of proven reserves is simply the near term inventory. This has been reduced, but has had little disruptive effect. This inventory still is a far cry from the ‘just in time’ practices of the manufacturing sector. Today-Lots of $$$, but Waiting for Transportation The major pipeline expansions of the early '90s have stalled out in the mid '90s. Only modest expansions are planned for 1995 to 1998, until the Northern Border expansion begins. While 1994 production benefitted from the full year of PGT expansion, 1995 export growth slowed to 245 Bcf or 9%, and 1996 year to date (seven months) is up a scant 1.4%. As a result, increased sales by one company can be achieved only through decline of another company's production, or by competing for an increase in market share. In the late '80s and early '90s it was generally thought that with the start-up of the Iroquois and PGT expansion and the Northern Border expansion around 1998, there would be adequate pipeline capacity from western Canada to release the excess supply that existed after the deregulation process in Canada. However, since the early to mid '90s there has been a substantial influx of capital into the Canadian oil and gas industry which has been translated into record drilling levels and another build-up of excess deliverability in the western Canadian producing region. Even with the Northern Border expansion, now delayed by one year to the end of 1998, excess deliverability and a need for additional pipeline capacity will remain in western Canada.