Why The Marcellus Shale Play Could Spell The End For Canadian Natural Gas
With rapidly expanding pipeline capacity and enough natural gas reserves to meet North American demand for decades, Pennsylvania’s Marcellus shale play is putting a stranglehold on the Canadian natural gas industry
When Procter & Gamble first went looking for a place to make toilet paper, the company landed in Wyoming County, Pennsylvania, a northeastern part of the state that, more than a half-century ago, was rich in wood, water and workers.
It was 1957, and if Wyoming County also happened to be within easy trucking distance of most of the U.S. population at the time, all the better. Today the plant is still P&G’s largest, and still produces some of the company’s most popular paper products. But since 2008, it’s also been producing another of life’s necessities in the U.S. northeast. The plant, like so much of the state, sits atop vast stores of high-quality natural gas, a once-scarce resource that is literally overturning the balance of power in this former rust-belt region. Where the plant once drew in 13 billion cubic feet (bcf) of natural gas per year from pipelines coming out of the U.S. Gulf Coast and the Western Canadian Sedimentary Basin, today it pulls that straight out of the rock beneath its parking lot. That’s bad news for Canadian natural gas producers, for whom a prolonged U.S. northeast cold snap can mean the difference between breaking the bank and breaking even. And, as if the discovery of the massive Marcellus shale wasn’t bad enough, it’s been accompanied by a rapid state-wide infrastructure build-out that’s reversing inflow pipelines, rewiring the electricity grid and forcing Canadian natural gas out of its main market, possibly for good.
For the first time since 1955, the U.S. is expected to become a net exporter of natural gas by mid-2017, due to decreasing Canadian imports and increasing exports to Mexico, according to the U.S. Energy Information Administration (EIA). Shale gas plays are solely to blame, and none more so than the mighty Marcellus. In the first 10 months of 2015, U.S. gas production was up 35 per cent over the same period in 2008. Over that same time, U.S. imports fell 31 per cent, with imports into the key U.S. northeast market accounting for the lion’s share of the drop. In the first two weeks of January, Canadian gas exports into the U.S. were down 22 per cent over last year, while exports into the northeast were down more than 56 per cent. It’s a trend the EIA expects will continue with soaring Marcellus production, despite tanking commodity values.
Anticipated Export Growth: 2018
Since January 2014, natural gas prices have fallen more than two-thirds at the Henry Hub distribution terminal, from US$6 per million btu to less than US$2 per million btu by December 2015. A glut of new northeastern U.S. gas is weighing on what are already low-demand prices, causing existing North American producers in far-flung regions like northwestern Canada to back out of the market. “It’s not going to change overnight,” says Tim Pickering, founder and president of Auspice Capital Advisors. “But are they [Americans] trying to be more self-sustaining and build pipelines? Yes. They’re going to selectively build pipelines and squeeze Canadian gas, and that’s what they’re doing.”
Down the highway from Wyoming County is Halliburton’s 55-acre Montgomery operations center, where manager Mike Queener shows off one of several frack pumping trucks with the words ‘Powered by American natural gas’ stenciled on the sides. “When we were up in Canada,” he says, “we had to scrape these off and make it say ‘Canadian natural gas.’” However, given how hot the market for natural gas drilling in Pennsylvania is compared to Canada, it’s been some time since any of these trucks were needed north of the 49th. With a horizontal gas well in Pennsylvania priced at around $4 million to $5 million each, it’s not that drilling in the Marcellus is necessarily a fire sale compared to regions in Texas or even the Canadian Montney. But where the play has a clear edge is in its pipeline takeaway capacity and its proximity to so much of the North American consumer base – two things that can’t be said about the Western Canadian basin. And with several more Marcellus gas pipelines poised to reach towards every corner of the compass in the coming 12 to 24 months, Canadian gas is likely to get squeezed out of not just the U.S., but its home and native land, as well.
Almost 30 years after Bill Emick left his central Pennsylvania farm with little more than a welding ticket and a travel trailer, he would return from a career spent building oil and gas pipelines in almost every state in the union except his own. “Anybody who got into this trade here had to travel out of town,” Emick says. But that changed in 2009 when the Marcellus really began to take off and Emick came home. In his first year back, Emick’s small pipeline fabrication company did about US$1 million in business on his initial investment of US$325,000. The next year, Appellation Pre-Fab made between US$15 million and US$18 million, and each successive year has brought “a steady US$30 to US$36 million a year in profits,” he says. “We went from six people in a two-car garage to 125 people working for me most of the time – going up to 250 people at peak season.”
With so much pipe going into the Pennsylvania ground, it’s a wonder there could be any undeveloped corridors left for Marcellus gas to travel. And yet, new long-haul pipelines carrying 24 bcf per day in all directions from Pennsylvania and parts of Ohio are already planned through to 2018, according to ITG Investment Research. Compare that to the Western Canadian basin’s total output last year of about 14 bcf per day, and then consider that almost all of that Canadian gas was bound for regions now within reach of the Marcellus. Most menacing of all from the Western Canadian gas producer’s point of view, are the pipeline expansion plans of companies like Enbridge, Nexus and Spectra Energy, which, when completed, will together pipe as much as 5 bcf per day of new Marcellus gas into Ontario by 2018.
But the east isn’t the only market that Canadian gas producers are in jeopardy of losing to the Marcellus. The American Midwest is up for grabs too. When the 2,700-kilometer Rockies Express Pipeline came into service at the end of 2009, its Colorado-to-Ohio span was – and is – one of the largest pipelines ever built in the U.S. It was, at the time, intended to deliver a much-needed boost for gas producers in Colorado and Wyoming, connecting them to the fuel-hungry U.S. northeast market where they could escape the Midwestern oversupply and fetch a far better price. But less than six years after the ribbon was cut on the multibillion-dollar pipeline, the one-time lifeline for Rocky Mountain producers was spun into a noose from its eastern end. On Aug. 1, 2015, the Rockies Express Pipeline was partially reversed, sending low-cost Marcellus shale gas into Chicago and the American Midwest, hammering local drillers. A July 2015 report in the Casper Star-Tribune, Wyoming’s largest newspaper, cites a Platts study projecting that sales of gas from the Rocky Mountain region into the Midwest would drop by 1.3 bcf per day between 2014 and 2020 as a result of the reversal, while sales into the area from the Marcellus would rise by 6 bcf per day over the same time.
But the Marcellus’s market impact could yet be broader still. With the global race to get liquefied natural gas (LNG) to markets in Asia and Europe now underway, Canada has yet to leave the starting line, although it plans to do so towards end of the decade. The U.S., on the other hand, is up and running with five terminals sending an average of 2.75 bcf of LNG overseas per month between May and October 2015. In addition, the U.S. has as many as two-dozen projects in the federal review phase, according to the latest data from the U.S. Energy Information Administration. In 2017, the Dominion Cove Point LNG terminal on the Maryland coast of Chesapeake Bay will begin exporting the liquid equivalent of up to 770 million cubic feet of Marcellus gas per day to India and Japan. “Surprisingly enough, there have been no projects proposed down around the southwestern Pennsylvania area on the Delaware Bay, which would really be the logical place for a project for [exports to] Europe,” says Fred Hutchison, executive director of LNG Allies, a Washington, D.C.-based nonprofit dedicated to diversifying U.S. energy markets. “That hasn’t yet materialized, but my own prediction is that somebody’s going to come up with an idea pretty quick.” To heighten foreign interest, Hutchison’s organization has been courting foreign ambassadors touring the Marcellus region, including those from Belgium, Estonia, Latvia and the Netherlands, while also reaching out to nations in Asia and South America. “There are a few things we’re trying to impress upon them and one is the scale of the development,” Hutchison says. “They would love to replicate in their countries what we have here with shale but it’s not going to happen. The glory days for U.S. gas are by no means over. This is just the beginning.”
Disclosed Long-haul Pipeline Addition
Nov. 2014 – Nov. 2018
In Canada, it may well be the beginning of the end. Before 2016 even began, Western Canadian shale gas producers were slashing their budgets in response to low prices and U.S demand constraints. NuVista Energy cut its capital budget in half for the year, while Encana and others like Painted Pony Petroleum cut theirs by a quarter. In January, Calgary-based Enerplus announced it was selling $193-million worth of Western Canadian upstream assets, nearly all of them natural gas, and investing further in its approximately 71 gas-producing wells in the Marcellus. Remarkably, Canadian gas production is still expected to rise overall with better well performance, lower labor costs and increased capital efficiencies. NuVista, for example, says it will cut its costs from $26,900 per barrel of oil equivalent per day in 2015 to $14,000 this year, resulting in a seven per cent increase in output, according to the company’s 2016 budget plans. Likewise, Painted Pony’s 2016 budget plan predicts a 44 per cent increase in production this year, plus an even larger jump when the AltaGas Townsend processing facility in northeastern B.C. begins receiving shipments before the end of the year. But most 2016 budget outlooks are based on an assumption that higher short-term prices for natural gas are a given. With winter coming to a close – a record-breakingly warm one at that – and gas storage levels remaining high, the assumption that gas prices will naturally rise would be a long leap of faith even without U.S. northeast states like Pennsylvania transitioning from net importers of gas to net exporters. “We are now completely demand-constrained here in the United States,” Hutchison says. “We are no longer supply-constrained.”
For Canadian gas producers, the picture is the same, only darker. Like those gas companies that previously sold and shipped products to power Procter & Gamble’s Pennsylvania site, Canadian gas producers’ main customer has found a cheap and plentiful alternative to their product. And it didn’t have to look much farther for it than the parking lot.
More posts by Todd Coyne
- Essential Oil: November 19, 2014
- Essential Oil: November 12, 2014
- Essential Oil: November 24, 2014
- Essential Oil: November 27, 2014
- Essential Oil: November 13, 2014