All That Gas | How Alberta Companies are Establishing New Markets for Natural Gas

The newfound abundance of natural gas is forcing the industry to do something it’s never done before – nurture new markets

Apr 1, 2010  

by Anthony A. Davis

Photography by Colin Way

“In our case, as an industry we’ve not done a good job of informing the public or the policy-makers of the opportunity that natural gas has.”
– Eric Marsh

Last year EnCana Corp. did something unusual for a commodity producer and unprecedented in the upstream natural gas sector. It installed Eric Marsh in the new position of executive vice-president, natural gas economy. For the first time, the inner circle of decision-makers at North America’s biggest gas producer includes somebody concerned with marketing and new business development.

Until now, those who drilled for natural gas thought little about drilling for customers as well. Marketing was a foreign concept in an industry where, once you found the resource, someone on the other end of the pipe was always prepared to buy it (at the right price). But the market dynamics have changed. Advances in horizontal drilling and fracturing techniques have made it possible to extract natural gas – huge amounts of gas – from the vast shale formations that lie under much of North America. Gas is so much more abundant than previously thought, it is not enough for producers to pump more of it at lower unit costs; their future depends on cultivating whole new markets to consume it.

“I would say more companies are beginning to look at these opportunities because, you know, if you really think about most businesses, they have some form of marketing their product,” Marsh says. “In our case, as an industry we’ve not done a good job of informing the public or the policy-makers of the opportunity that natural gas has.”

Before Alberta’s policy-makers announced new royalty rules for conventional oil and gas on March 11, it appeared that many producers thought the Alberta government had failed them in pursuit of the province’s “fair share.” Vice-president of oilsands and markets for the Canadian Association of Petroleum Producers Greg Stringham says the new regime announced by Premier Ed Stelmach should help the industry regain strength. “The royalty changes are really on the production end, so from that perspective what the changes will mean is really trying to establish Alberta as trying to be competitive amongst its peers.” From a public perception, the standard of regulation remains the same, but the changes improve the system’s efficiency, Stringham says.

“There’s been a big shift in how we think about our business,” agrees Tim Wall, last year named president of Calgary-based Apache Canada, a subsidiary of Apache Corp., the third largest independent oil and gas producer in the United States. Wall is overseeing a ramping up of exploration and drilling in the shale-rich Horn River basin of northeastern British Columbia in partnership with EnCana. At 10 trillion cubic feet of gas (perhaps 30% to 40% of that recoverable with current technology), Horn River is heralded as perhaps the largest shale gas find on the continent. That basin alone could supply Canada with enough natural gas to last decades.

Wall’s background is as a petroleum engineer. But these days, he’s going to have to think more like the ad men of Mad Men to find consumers for all that gas. “When you have a big resource like a shale gas play, just to have it commercial you need some opportunities and some alternatives to commercialize the asset,” says Wall. “Now we’ve grown the resources to where we have as much as a 100-year supply for domestic resources. People just don’t understand the magnitude of change that has happened in the industry in the last couple of years.”

Apache’s answer to the gas glut was revealed late last year when it purchased a 51% stake in Kitimat LNG, an estimated $3-billion liquefaction facility under construction on British Columbia’s northern coast. Originally the Kitimat facility was designed to import liquefied natural gas, re-gasify it and sell it to North American consumers. But in 2008, as it became apparent just how much gas could now be sucked out of shale deposits in Western Canada, Kitimat reversed its business plan. When it goes online in 2014, it will export gas to the Asia-Pacific region and, via an expanded Panama Canal that will open that same year, to Europe. The Kitimat acquisition gives Apache a whole new outlet for its Horn River gas instead of fighting for access to a faraway and increasingly self-sufficient U.S. gas market.

EnCana has a different idea, to boost gas usage right here in North America as a transportation fuel. The company is working with the Canadian transportation industry to convince federal and provincial governments to support development of two pilot natural gas transportation corridors. One would run between Edmonton and Vancouver and another, the “401 Corridor,” between Windsor, Ont., and Quebec City. Compressed natural gas (CNG) or LNG refuelling stations would be built for use by fleet vehicles, buses and semi-trailers that regularly travel either corridor. Natural gas, depending on the region, can be 25% to 45% cheaper than gasoline or diesel and creates about 25% to 34% less carbon dioxide emissions per distance travelled. Even with the extra cost of purchasing transport trucks with natural-gas compatible engines, the lower fuel cost can mean big savings over the long term for frequently driven vehicles.

Complementing the economic argument for gas is the environment card. “When you look at Canada’s greenhouse gas (GHG) emissions, roughly one-quarter of them come from the transportation sector and the largest amount of that is really these larger vehicles,” explains Marsh. “Right now there is not battery technology to allow these large trucks to run on batteries. So this is a great opportunity to use natural gas in these large trucks and significantly reduce emissions.”

While natural gas has a lot more uses than most people know, including as a raw material in the manufacture of disposable diapers, plastics, paints and fertilizers, the transportation industry, especially overseas, is eyed as a sweet spot for selling North America’s shale gas surplus. So far in North America, according to the American Natural Gas Alliance, 38% of natural gas is used for heating and cooking in residential and industrial applications. Another 31% is currently used for electrical generation. But in Canada and the U.S., only 1% of natural gas is consumed by the transportation industry by cars and trucks.

By contrast, in Brazil 40% of cars run on natural gas. Natural gas vehicles (NGVs) – even cars – are already a fairly common sight on Asian and some European roads. Worldwide in 2008, according to International Road Federation statistics, there were 9.6 million NGVs, two million in Pakistan alone. In Europe, where car makers like Fiat and Peugeot offer models with natural gas engines, Italy leads with 580,000 vehicles and 700 CNG refuelling stations. By comparison, Canada has only 12,140 NGVs and the U.S., 110,000 – in both cases mostly buses and a smattering of heavy-duty trucks such as CNG garbage trucks. The Honda Civic GX is the only commercially made natural gas passenger vehicle available in the U.S. But it’s sold only in Utah, California and New York and mostly to fleets.

In fact, the prevalence of NGVs in North America is declining. Back in 2002, there were around 30,000 in Canada, more than twice as many as there are now. “We’ve kind of been there and done that,” says Mark Nantais, president of the Canadian Vehicle Manufacturers’ Association. One reason for the retreat, aside from some bad press over fires in some NGVs, says Nantais, is range, especially for passenger vehicles. Natural gas cars, which typically carry their compressed gas in pressure tanks in the trunk, usually have a range limited to about 300 kilometres. The 2010 Civic GX manages 400.

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