Warm winter, lower prices and increased US competition to keep natural gas supply lower

CALGARY, June 9, 2016 /CNW/ - The National Energy Board (NEB) today released its Short-term Canadian Natural Gas Deliverability, 2016-2018 report that projects supply and future pricing for Canadian natural gas over the next two years.

Canadian natural gas deliverability, or the projected amount of gas supply, is expected to continue declining over the next year as less is needed to refill storage after last year's warmer-than-average winter. More production coming from the northeastern United States (Utica and Marcellus shale gas) will further challenge Canadian output going forward.

The price for North American natural gas, which has been on a downward trend since mid-2014, is expected to decline further this year dipping to $2.50/MMBtu, down from $2.70/MMBtu in 2015. Prices are then expected to gradually trend higher, reaching $3/MMBtu by 2018. These prices are taken from the NEB's mid-range case and represent the Henry Hub reference point in US dollars.

The decline in crude oil and natural gas prices since 2014 has had a profound impact on Canadian gas producers, reducing revenues, and constraining cash flow. Despite significant capital expenditure cuts in 2015, many small and mid-sized producers are struggling with bank-imposed debt limits while maintaining minimal drilling operations to help slow declines in reserves and production.

While Canada's liquefied natural gas (LNG) export picture remains unclear, a final investment decision on one or more of the proposed projects could accelerate pre-positioning by producers and help stimulate activity leading to supply increases.

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Short-term Canadian Natural Gas Deliverability, 2016-2018

Report highlights:

• Western Canada is the primary natural gas producing region, contributing 99 per cent of total Canadian natural gas production in 2015. The remainder is supplied by Nova Scotia, Ontario and New Brunswick.
• The lower Canadian dollar has provided a modest boost to revenues as exports to U.S. markets are paid in U.S. currency. It also creates challenges as some equipment and required supplies are purchased from the U.S. and paid for in U.S. dollars.
• Natural gas exports to the U.S. Midwest continued to decline in 2015, as pipeline reversals and expansions flow more U.S. Marcellus and Utica gas into central Canada. Part of this decline was made up by increased Canadian gas exports to the western U.S. as higher temperatures increased demand for gas-fired power generation to meet air conditioning demand.
• Modern drilling technologies, such as multi-stage hydraulic fracturing and multi-well pads, are now used extensively throughout North America, improving the size and economics of the Canadian and U.S. natural gas resource base while boosting deliverability.
• Proposed LNG export facilities represent a large potential increase in gas demand, although long lead times to obtain approvals, establish overseas markets and construct facilities are factors that impact the development of these projects.
• Despite the challenging environment, North American producers may continue to make production gains on a per-well basis through focusing drilling efforts on their most economic prospects.

Quote:

"Canadian natural gas drilling decreased significantly last year as lower prices, major cuts to capital spending and increased U.S. competition continue to impact the industry. Our mid-range forecast shows modest gas price increases within two years, assuming moderate economic and gas demand growth in North America, as well as weather conditions back in line with seasonal averages," said Shelley Milutinovic, Chief Economist, National Energy Board.

The National Energy Board is an independent federal regulator of several parts of Canada's energy industry with the safety of Canadians and protection of the environment as its top priority. Its purpose is to regulate pipelines, energy development and trade in the Canadian public interest. For more information on the NEB and its mandate, please visit www.neb-one.gc.ca.

SOURCE National Energy Board

James Stevenson, Communications, National Energy Board, Tel: [phone], Email: [email protected]