Technology advances such as horizontal drilling, 3-D seismic technology and hydraulic fracturing may have sparked an unconventional gas production boom in North America, but success in one country could usher in challenges and opportunities for another.

Yet, uncertainty is still a part of the picture.

A report released by the Canadian Energy Research Institute (CERI) shows that Canada is losing business from its top natural gas customer, the U.S., which is preparing to become a natural gas exporter of its own by 2017 thanks to the shale revolution. Gas production from the Marcellus Shale appears to be the proverbial nail in the coffin for the potential for any rising gas exports from Canada into the U.S.

Transportation infrastructure and economics have also left parts of eastern Canada turning to the U.S. for gas, despite Canada having an estimated 1,087 trillion cubic feet (Tcf) of marketable natural gas reserves—mostly, however, in the Western Canadian Sedimentary Basin. The report showed U.S. gas imports from Canada have fallen from a peak in 2007 of 3,837 Bcf to 2,636 Bcf in 2014.

“Lower-cost Marcellus gas is closer to markets in eastern Canada, the U.S. Northeast and U.S. Midwest, giving it cost advantages over western Canadian gas,” CERI said in the report. “Marcellus shale gas has already significantly displaced Canadian exports from the U.S. Northeast market and gained additional pipeline access to the U.S. Midwest beginning in 2016.”

The forecast was released as the industry continues to cope with lower gas prices. The average monthly spot price at Henry Hub has plummeted from US$13.31 per million British thermal units (MMBtu) in July 2008 to US$1.92/MMBtu in May. The prices on the Canadian benchmark equivalent, AECO-C, have fared no better—falling from CA$10.24/MMBtu in May 2008 to US$1.07/MMBtu in May, according to the report.

Total Canadian Natural Gas Production

Production

But the future is not all bleak for natural gas in Canada. The country’s top two gas-producing provinces—Alberta and British Columbia—are forecast to ramp up production as it prepares to feed LNG projects starting in 2022. The uptick is expected to come after gas production declines between 2016 and 2018 as producers adjust to lower commodity prices, according to the report.

In Alberta, for example, the number of natural gas wells is forecast to increase from 726 in 2016 to 1,270 in 2036. More than 80% of the new wells are expected to be horizontal wells, which generally have “lesser supply costs and have a larger number of pipeline influence areas whose supply costs fall below the 2016 and 2037 AECO-C prices.”

Most of Canada’s natural gas is produced in Alberta.

Alberta Wellhead Natural Gas Production Forecast

“When looking at drilling numbers in specific formations, the corridor to the east of the Rocky Mountains has collectively the highest concentration of activity. Formations include Alberta’s Montney, Doig, Cardium, Banff, Glauconitic and Beaverhill as well as collective smaller pools. The weighted average supply cost of the 10 Alberta areas in this region is $1.83/Mcf.”

One of the world’s top natural gas producers, Canada produced about 6.4 Tcf of gas in 2014. CERI forecasts gas production will rise in the coming years to accommodate LNG projects and surpass 20 Bcf/d by 2036.

“The North American natural gas market is, for the most part a continental market, though LNG is changing that fact,” CERI said.

Uncertainties

According to the provincial government of British Columbia, there are at least 20 proposed LNG export projects in various stages of development. But challenging market conditions have caused some to postpone making final investment decisions (FIDs) and address other concerns.

An FID on ExxonMobil Corp.’s (NYSE: XOM) proposed WCC LNG facility, which would receive feed gas from the Western Canada Sedimentary Basin, will depend on factors that include the investment climate, regulatory approvals and other business considerations, the company said.

In addition, Petronas and partners’ planned Pacific NorthWest LNG export terminal in northern British Columbia is facing environmental scrutiny. Reuters reported that a Canadian review of the proposed plant determined the project “would have a significant environmental impact that requires major remedial measures.”

Malaysia’s Petronas and its partners also have not made a financial decision on the project.

The timing and size of the proposed LNG plants in British Columbia as well as gas for electricity generation in Alberta were identified as the two major uncertainties in CERI’s natural gas forecast.

“If none are built, this could remove upwards of 5 Bcf/d of gas production,” CERI said. “With the government’s policy of moving away from coal-fired generation, natural gas demand would likely increase. It is uncertain when that additional demand would occur and by how much.”

Regardless, Canadian producers are likely to continue efforts to improve gas wellhead economics. But any expansion of gas activity in Canada will require costs to fall further, according to CERI.

“We note that horizontal wells sharing the same well pad will be the default choice for producers over the forecast period,” CERI said in the report. “As well, gas well economics improve with the presence of [NGL].”

Velda Addison can be reached at vaddison@hartenergy.com.