In Parched California, a Market for Canada’s Gas Emerges

Photographer: Chris Pritchard/Getty Images

Driven out of their best U.S. markets by the shale boom, Canada’s gas producers are turning to the power-hungry West Coast.

Canadian gas shipments to Washington state are the highest seasonally since at least 2008, and exports through a border point in Eastport, Idaho, surged in November to a winter record, data compiled by Genscape Inc. show. Demand from California gas-fired power plants is increasing as a drought now in its fourth year cuts hydroelectric production.

A flood of low-cost Marcellus gas from Pennsylvania and West Virginia helped cut Canada’s shipments into the Midwest, its biggest export market, by 16 percent in the past three years, U.S. government data show. Liquefied natural gas export terminals in British Columbia have been delayed while Alberta’s oil sands companies, which burn gas to melt bitumen, curtailed expansion plans after crude prices plunged.

“Western Canadian gas producers have essentially no place for their gas to go in the near term except the Pacific Northwest, if local demand can’t take it,” Rick Smead, managing director of advisory services for RBN Energy LLC, a Houston-based consulting company, said in a phone interview. “Nothing will go east to speak of and the LNG projects seem to be pretty gridlocked.”

Alberta gas producers, who last year lost a decade-long price advantage of as much as $1.92 per million British thermal units to gas from the U.S. Northeast, have found better prospects out West. Western Canadian gas traded at an average discount of 85 cents per million British thermal units to the fuel in Northern California over the past year, according to price data compiled by Bloomberg.

Henry Hub gas futures on the New York Mercantile Exchange, the North American benchmark, traded at $2.708 per million Btu at 1:27 p.m. Monday.

Price Comparison

The low prices are aiding sales in California, the second-biggest U.S. electricity consumer, after Texas. Prices at Canada’s benchmark AECO hub fell 5.7 percent Feb. 27 to $2.14 per million British thermal units. At Pacific Gas and Electric Co.’s Citygate hub in Northern California, prices fell 7.7 percent to $2.89.

Gas flows into Washington reached 1.15 billion cubic feet a day on Feb. 24, the highest for the month of February since at least 2008, when Genscape began compiling the data. Shipments into Idaho reached a heating-season record of 2.32 billion cubic feet a day on Nov. 13.

Hydro power supplied 10 percent of California’s electricity in the first half of 2014, down from an average of 20 percent during the same period from 2004 to 2013, according to a U.S. Energy Information Administration report.

Gas demand in California will climb 7 percent this year from 2011 levels, state Energy Commission data show. Deliveries to state power plants rose to 84.3 billion cubic feet in October, the most for that month in EIA data going back to 2001.

Power Plants

“Canadian gas is the largest single source of gas supply in our very diverse portfolio,” said Joe Molica, a spokesman for PG&E Corp.’s Pacific Gas and Electric, California’s largest electric utility, in a Feb. 23 e-mail from San Francisco.

Canada needs the California sales to overcome lost business and the impact of crude prices that fell almost 50 percent last year. Pipeline shipments to the U.S. totaled 227.4 billion cubic feet in November, down 22 percent from the same month of 2008, according to EIA data.

Demand elsewhere has yet to materialize. LNG export projects in British Columbia face higher costs than similar terminals in the U.S. because of a lack of pipelines and infrastructure. And with international LNG prices linked to crude, the drop in oil may harm Canada’s ability to compete.

LNG Projects

Petroliam Nasional Bhd. deferred a decision to build its C$36 billion ($29 billion) LNG project citing low oil prices, and BG Group Plc delayed its proposal as well. Smaller-scale export terminals, such as a project being led by AltaGas Ltd., are still moving forward.

Oil sands producers in Alberta have scaled back expansion plans as Suncor Energy Inc. and Royal Dutch Shell Plc announced a combined 1,300 job cuts.

Surging output of cheap Marcellus gas is even pushing Canadian supplies out of eastern Canada.

The export point for Canadian gas at Niagara Falls, New York, has turned into a gas import site, while the Iroquois location south of Ottawa is “trending toward becoming” an import point as well, Canada’s National Energy Board said in a Feb. 5 report.

“This whole shale gas revolution has transformed everything we knew about where gas needs to go,” Carlos A. Murillo, economic researcher at the Canadian Energy Research Institute, said in an e-mail Feb. 24. “It’s a big change.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE