Canadian Manufacturing

LNG struggling but rising prices to bring relief, says Conference Board of Canada

Canadian natural gas is being squeezed out of markets by increased U.S. production, but regional export opportunities in the U.S. still exist, and rising prices will return Canada's industry to profitability next year



OTTAWA—Prospects for Canada’s natural gas producers are looking grim as continued strength in U.S. production weakens prices and demand for Canadian gas, according to a new report from The Conference Board of Canada.

“North America’s regional natural gas market has changed greatly over the last decade. Rising U.S. shale production has increasingly squeezed Canadian natural gas out of some U.S. markets,” said Carlos A. Murillo, a Conference Board economist.

“Not only is the U.S. market moving toward self-sufficiency, but the U.S. gas industry is also beating Canadian competitors in the race to enter global liquefied natural gas (LNG) markets,” he added.

U.S Growth, Canadian Stagnation

U.S. natural gas production has increased by 40 per cent in the last decade, mainly due to rapid increases in U.S. shale gas output.

In the meantime, Canadian production has stagnated. With U.S. shale gas production displacing imports of Canadian gas, our exports are now 25 per cent lower than they were 10 years ago.

North American natural gas demand is expected to remain relatively flat and Canadian exports to the U.S. could continue to decline over the next five years. Demand from Canada’s electricity generation and industrial sectors will increase, but these gains will not be enough to offset a decline in exports.

Regional Opportunities

But it’s not all bad news for Canada’s industry. The rapid buildup of U.S. LNG export capacity in the coming years indicate that export increases will outpace production gains south of the border.

This creates an opportunity for Canadian gas to help fill some regional demand in the U.S.

Some Canadian producers are also signing contracts to export LNG via the U.S., indicating that, while LNG export facilities in the U.S. are competing head on with Canadian projects, they may also provide a new marketing outlet.

TransCanada’s recent success in securing long-term commitments for its mainline is another positive development for the industry.

“Key to this deal is that Western Canadian gas may manage to hold on to, and possibly increase, its market share in Central Canada and the northern U.S.,” said Murillo.

Prices Rise as Losses Narrow

Last year, above average temperatures helped drive natural gas inventories well above historical norms. Combined storage levels in Canada and the U.S. in 2016 were close to 20 per cent higher than their five-year average. This, in turn, sent prices to their lowest levels in nearly two decades.

However, prices are expected to recover, as rising U.S. exports and increased industrial domestic demand help push prices higher, starting this year.

Canadian prices are forecast to rise from $3.13 per million British thermal unit in 2017 to $3.82 by 2021.

Despite higher prices, Canada’s industry will remain in survival mode in the coming years.

Industry revenues are expected to increase over the forecast, but this is due mainly to higher prices rather than greater production volumes.

Although industry losses are beginning to narrow, it will take until late in 2018 for the industry to return to profitability.

Following pre-tax losses of $7.6 billion in 2016, Canadian natural gas producers can expect losses to narrow down to $2.8 billion this year.

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