The Alberta government is concerned about the future of natural gas development and wants to facilitate greater market access for LNG.
According to Premier Jason Kenney, ‚ÄúThe single biggest thing we could do to reduce global CO2 emissions would be to massively increase Alberta LNG exports to Asian and other markets.‚ÄĚ
In recognition of the importance of the natural gas industry, Kenney‚Äôs UCP government has appointed the province‚Äôs first associate minister for natural gas (Morinville-St. Albert MLA Dale Nally), backed by an associate deputy minister for natural gas.
‚ÄúThis is because the gas industry gets crowded out and marginalized by all of the excess focus and attention on oil in general and bitumen in particular,‚ÄĚ said the premier. ‚ÄúWe want to have a voice at the political and senior officials‚Äô level that is ever focused on representing the best interests of the gas producers.‚ÄĚ
In its election platform, the government committed to implementing all the relevant recommendations of the Natural Gas Advisory Panel co-chaired by Hal Kvisle, a retired CEO of TC Energy Corporation. Kenney said he has been talking to Russ Girling, the company‚Äôs current CEO, and ‚Äúwe know there are a number of very complex interconnected issues on this.‚ÄĚ
Kenney said his government also believes that it needs to work with its municipal partners to address the challenge of ever-increasing property tax bills ‚Äúthat are close to killing‚ÄĚ some of Alberta‚Äôs natural gas companies with more mature dry gas assets. These companies have been running down their balance sheets over the last two years and simply cannot afford to pay property taxes at those levels, he said.
‚ÄúI want to have a very frank conversation with those municipalities and my advice will be: do not kill the goose that laid the golden egg,‚ÄĚ the premier said.
As for the government‚Äôs pledge to reduce red tape, ‚Äúwe mean to move fast on this,‚ÄĚ with a Red Tape Reduction Act and the appointment of associate minister for red tape reduction, he said. The government will follow the template of former British Columbia premier Gordon Campbell who targeted a one-third reduction in the number of regulatory requirements imposed on the B.C. economy and managed to reduce the number by 41 per cent. That is one of the reasons B.C. has had strong economic growth for 15 years, according to Kenney.
‚ÄúWhat has happened to our idea of ‚Äúget ‚Äôer done, Alberta?‚ÄĚ he asked. ‚ÄúWe all slap ourselves on the back for having this great entrepreneurial culture but for some reason in the good years we allowed an ever-growing layering of regulatory complexity ‚Ä¶ and now we find ourselves one of the most over-regulated and slowest-moving economies in North America,‚ÄĚ Kenney said.
The previous Alberta NDP government was urged by the natural gas panel to take a leadership role in resolving the ‚Äúserious and troubling headwinds currently assaulting‚ÄĚ the province‚Äôs natural gas resources.
‚ÄúAlberta has an opportunity to position itself as a competitive and responsible place for future natural gas investment,‚ÄĚ the panel of Kvisle, Brenda Kenney and Terrance Kutryk, said in a 72-page report (Roadmap to Recovery: Reviving Alberta‚Äôs Natural Gas Industry) to then energy minister Marg McCuaig-Boyd. In a carbon-constrained future, the transition to lower carbon fuels will drive growth in natural gas use in North America and globally, it suggested.
Although Alberta‚Äôs abundant, world-class natural gas resources can provide economic opportunities for generations of Albertans and Canadians into the future, ‚Äúurgent action is required now to ensure Alberta capitalizes on this legacy,‚ÄĚ the panel warned.
It said that in its engagement with stakeholders several common themes had emerged including regulatory ‚Äúparalysis,‚ÄĚ the pace and scale of LNG development, pipeline system lag, the recognition of natural gas as a low carbon fuel and Alberta competitiveness.
Describing the challenges facing the gas industry as ‚Äúsevere,‚ÄĚ the panel emphasized the need and urgency for the implementation of practical remedies to reduce regulatory inefficiency to restore the health of an industry that has the potential to contribute up to $231 billion in Alberta GDP between 2017 and 2027.
‚ÄúLengthy federal and provincial and bureaucratic processes are a major impediment to the future success of Alberta‚Äôs natural gas industry,‚ÄĚ it said. ‚ÄúThe need to understand and mitigate environmental and social impacts is well understood by industry participants, but regulatory processes have broken down in the face of relentless activist pressure and ineffective process management by regulatory and government authorities,‚ÄĚ the report stated. ‚ÄúThis must be resolved.
In the short-term, though, one of the most effective actions to ‚Äúgrow the pie‚ÄĚ is securing a second world-class West Coast LNG project that achieves its final investment decision by December 2020, said the panel. To expedite large-scale, long-term LNG projects, it recommended strong co-operation and alignment between the Alberta and British Columbia governments.
‚ÄúWe certainly hope that we get through FID [final investment decision] on another major West Coast LNG project and we will be as facilitative as we can in that respect,‚ÄĚ Kenney said.
Increasing market access also means seeking a closer relationship with Quebec. The Alberta premier met last week with Premier Francois Legault, where he was expected to discuss the proposal for the Energie Saguenay LNG project and another LNG proposal to the Gulf of St. Lawrence.
‚ÄúLNG represents the best opportunity for western Canadian demand growth and diversification, and is regarded as the only option that will make a material difference in western Canadian natural gas markets,‚ÄĚ the panel said.
‚ÄúAchieving multiple LNG projects is vital to the ability of Alberta‚Äôs natural gas sector to recover and flourish,‚ÄĚ it said. ‚ÄúAnd yet, for Alberta to compete successfully in proposed LNG projects, the systemic challenges surfaced in this report must be resolved.‚ÄĚ
The Canadian regulatory and political environment has not been supportive of world-scale LNG projects, it noted, citing the 2017 decision by PETRONAS to abandon its proposed LNG project near Prince Rupert.
‚ÄúCanadian regulatory processes and the absence of a skilled labour force on the West Coast are major drivers of both delays and costs,‚ÄĚ said the panel. ‚ÄúIn addition, large energy projects across Canada are often subject to a myriad of stall tactics by opponents, challenging jurisdiction or minor details of permitting, seeking to frustrate proponents through significant and costly delays in hopes they will eventually abandon their projects.‚ÄĚ
While these risks are real, they can be overcome with strong leadership from governments that not only set forth a compelling vision for the sector, but enable its execution with the necessary means and protections, the report suggested.
Collaboration between Alberta and B.C. also could resolve regulatory issues, exerting provincial pressure on the federal government, the National Energy Board (NEB) and other federal agencies, it said. That alignment also could find solutions to Indigenous issues that bring benefits to Indigenous communities without risking the economics or delaying the construction of LNG infrastructure.
‚ÄúProvincial governments must weigh in to provide a counterbalance to relentless activist opposition to energy development in Western Canada,‚ÄĚ said the report. ‚ÄúStrong commitment by governments and companies to environmental and social pipeline performance is crucial; the support of government must continuously improve and be transparent and verifiable.‚ÄĚ
The crux of the issue is whether or not Canada will produce its fossil-based energy reserves, said the report. ‚ÄúTo secure long-term LNG projects and the related economic benefits, governments must be unequivocal that their answer is yes.‚ÄĚ
The panel proposed that Canadian governments consider assisting long-term throughput and marketing commitments on pipelines and liquefaction plants moving western Canadian gas to Asian markets. ‚ÄúLong-term throughput commitments supported by credit-worthy governments send a strong signal of support for large infrastructure projects.‚ÄĚ
To enhance the financial ability of small producers to make long-term pipeline commitments, the panel said the Alberta government could launch aggregate credit support pools. ‚ÄúContract term guarantees or letters of credit need not involve government support, however, Alberta can conduct reverse auctions on behalf of producers for third parties to provide these services,‚ÄĚ it said.
The government could also consider direct participation as a long-term shipper or credit provider, ideally in the form of latter year commitments, or alternatively, Alberta and B.C. could contract for long-term transportation and liquefaction capacity for resale on a short-term basis.
The panel, though, urged government caution in examining direct participation in the building, ownership, and operation of pipelines and LNG facilities. ‚ÄúPrivate sector operators are better positioned to manage the risks and complexities of planning and executing such projects,‚ÄĚ it said.
In its report, the panel emphasized the need to encourage industry durability and long-term sustainability with Alberta setting the vision with a strong position on natural gas, including market access, competitiveness and public interest decision-making.
Among the issues the natural gas industry has to contend are pipeline capacity issues and barriers to incremental expansions, the panel found.
Alberta should achieve greater system flexibility and responsiveness through spare pipeline capacity on critical pipeline segments through expansion of major trunk lines within Alberta, primarily on the NOVA Gas Transmission Ltd. (NGTL) System, said the report. The panel recommended that the Alberta government work with producers, pipeline companies, and the NEB to add appropriate spare capacity quickly.
‚ÄúSuch spare capacity may raise tolls, but higher tolls would be offset by narrower differentials and higher NIT [NOVA Inventory Transfer] prices, which would also increase Crown royalties,‚ÄĚ it said. ‚ÄúThe overall economic cost to producers and governments of being ‚Äėpipe short‚Äô is far greater than the risk of carrying extra costs of being ‚Äėpipe long‚Äô with underutilized capacity.‚ÄĚ
The costs could be recovered through broad-based NGTL tolls, recognizing the unique considerations of legacy producers who have been paying transportation tolls on depreciated assets for many years and who do not require the incremental capacity, said the panel.
‚ÄúThe Alberta economy would benefit from the accelerated expansion of NGTL,‚ÄĚ the report concluded. ‚ÄúAn accelerated expansion application by TransCanada, supported by producers and the Government of Alberta, would almost certainly receive approval by the NEB.‚ÄĚ
Alberta‚Äôs existing gas transmission infrastructure is stressed to capacity as a result of a massive shift in production from mature southeast Alberta plays to the Montney and Deep Basin plays of northwest Alberta and northeast British Columbia,‚ÄĚ said the panel.
Expansion and optimization of the NGTL System has not kept up with growth in gas production and this has resulted in severely negative impacts on wellhead prices, producer cash flows, and provincial royalties, it noted. ‚ÄúIneffective regulatory processes and complicated, burdensome commercial arrangements must be addressed to accelerate NGTL expansion, provide spare capacity, and make sure our future production can get to market unimpeded.‚ÄĚ
Although commitments to move gas from wellhead to NIT are not especially difficult for producers, the timelines for connecting gas to NIT are excessive, according to the panel. ‚ÄúSomewhat greater contractual flexibility and accelerated regulatory approvals would improve access from wellhead to NIT,‚ÄĚ it said.
At the same time, commitments to move gas from NIT to Empress or Crowsnest are contractually and financially difficult, and represent severe barriers for producers wishing to move their gas to markets beyond NIT, said the report. ‚ÄúShorter contract terms, contract renewal optionality, and more efficient regulatory processes are required to alleviate the bottlenecks between NIT and Empress or Alberta-B.C. border export delivery points.‚ÄĚ
Panel recommendations included the establishment of finite competitive timeframes for both routine applications and for each stage of more complex, non-routine application approvals. The report also proposed the province act as a facilitator with TC Energy/shippers on plans to increase capacity on constrained sections of the NGTL System.
In the medium term, the panel proposed that the government introduce a provincial pre-approval process so projects can be ‚Äútrigger ready‚ÄĚ for more timely capacity additions along with seeking alternative proposals for capacity additions within Alberta as these would not be federally regulated.
The panel also acknowledged that when it comes to adding new capacity, it is difficult to achieve consensus on solutions due to competing cost and revenue models.
Shippers with market diversification and sufficient (often excess) firm capacity do not need additional capacity and oppose paying for something they do not need, it said. Legacy producers (mainly dry gas in the south) are already cost-challenged and are resistant to paying for service additions in areas they would not use. ‚ÄúThis is stretching at the fabric of the ‚Äėrolled-in‚Äô tolling principle,‚ÄĚ the report suggested.
While LNG export markets are important, Western Canada also offers large, stable and growing markets for natural gas by virtue of cold winters, growing industrial demand and growth in gas-fired power generation, said the report. ‚ÄúImportantly, the western Canadian gas market is generally not accessible to U.S. producers.‚ÄĚ
Gas-fired power generation also could become an attractive market for western Canadian natural gas as coal-fired plants reach end of life, it said. ‚ÄúGas-fired generation is complementary to wind and solar, meeting demand two-thirds of the time when wind and solar are not available.‚ÄĚ
Pipeline tolling arrangements that simplify existing tolling structures within Western Canada would have a positive impact on regional gas demand, the report concluded. For example, a seamless tolling model to move gas from northwest Alberta to burner tips in Manitoba, Saskatchewan, and southeast B.C. would allow producers greater flexibility in serving those markets through shorter-term, more competitive marketing arrangements, it said.
Although TC Energy is willing to simplify western Canadian tolling arrangements, producer support and regulatory approvals are required, said the panel, which urged the Alberta government to voice its support.
This initiative is supported by the Canadian Society for Unconventional Resources, a leading Canadian source of factual, unbiased technical information on the development of unconventional oil and gas resources.