Canada has long been a major natural gas supplier to the U.S., exporting 8.8 billion cubic feet (Bcf) per day of gas in 2005-or about 15% of total U.S. consumption. But this amount of export supply is likely to diminish considerably-and tighten North American gas markets-as Canadian oil-sands development continues to heat up.

"We estimate that (daily) Canadian gas exports [to the U.S.] will decline each year from 2005 to 2020, and will in the aggregate fall by 5.5 Bcf, or 63%, over this period," says J. Marshall Adkins, head of the equity-research team for Raymond James & Associates in Houston. "If this occurs, the implied supply gap would represent 9% of total U.S. gas consumption."

He emphasizes, "Anything that impairs [Canada's] ability to export gas is a bullish driver for North American gas prices."

While recent stagnation in Canadian gas production would itself be a key factor limiting Maple Leaf gas-export capacity, along with that country's own rising demand for gas, the researcher stresses there is increasing reliance on gas for Canada's oil-sands development projects.

The Alberta Energy and Utilities Board estimates that more than 175 billion barrels of proven reserves exist within the oil sands of western Canada-and current record-high oil prices provide an economic incentive to develop that resource, which did not exist to the same extent when oil was below $40, says Adkins.

This heavy, viscous oil, he explains, requires substantial amounts of natural gas during the extraction process.

Open-pit mining, the most widely used oil-sands extraction process, employed 261 million cubic feet per day of natural gas in 2005, and it's projected that this extraction process will use 1.1 Bcf of gas per day by 2020-more than quadruple last year's level.

Oil-sands companies, however, are increasingly turning to the "in-situ" method for the recovery of Canada's deeper oil-sands deposits. The method injects steam or natural gas into the deeper oil-sands deposits, lowering the viscosity of the oil and allowing it to flow more freely to the surface.

In 2005, it-situ recovery used 246 million cubic feet of gas per day, and this level is projected by the Raymond James energy team to rise five-fold by 2020, to 1.2 Bcf per day-overtaking the amount of gas used by the open-pit mining method.

"In total, as production intensifies in Canadian oil-sands projects during the next 15 years, the amount of yearly natural gas required for the two extraction processes is anticipated to grow by more than 300%, from 500 million cubic feet per day to 2.3 Bcf," says Adkins.

"Combined with rising non-oil-sands Canadian natural gas demand and stagnant Canadian gas supply, this is almost certain to greatly limit the excess amount of gas available for Canada to export to the U.S.."

Given all these export-limiting events, and with U.S. natural gas production on the decline, "the aggregate tightening of the North American gas market should be a bullish long-term driver for natural gas prices," Adkins concludes.



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