Development Options For Canadian Natural Gas

Abstract The purpose of this paper was to provide a methodology for, and preliminary economic examination of, alternative development options for western Canadian natural gas. Four development options were addressed:pipeline exports to the United Statesdomestic pipeline expansion to the f1ar; timesLNG exports to Japanmethanol manufacturing in Alberta Each option was evaluated in terms of the costs and benefits which accrued as follows:producer returnsproject sponsor returnsgovernment returns Market prices, capital costs and operating costs were estimated for each project. Utilizing th1s information and three computer models – a cost of service model, a process cash flow model and a producer cash flow model – for economic analysis, cash flows resultant under each opt1on could then be determ1ned. Upon aggregation of this data, the returns to each participant were found. The results were shown in terms of real 1982 Canadian dollars, both undiscounted and in net present value terms, discounted at 10 percent. Results indicated that expanded pipeline exports to the United States are probably the most attractive option for Canada. While a methanol projectwill yield a slightly higher net present value, $2.8 billion vs. S2.6 billion, the export scheme would provide adequate returns to both producers and project sponsors. Methanol will provide only marginal economic incentives for producers. The LNG export project is economically viable for both producers and sponsors, however the overall net present value of $1.4 billion is lower than competing projects. Proponents argue that the flexibilityafforded Canada outweighs this deficiency. Domestic pipeline expansion is not economic for producers, yielding a negative net present value of $0.10 billion. Introduction 2.1 Exportable Surplus The National Energy Board (NEB) authorizes exports based upon supply and demand parameters. Three tests are set by the MEB – Current Reserves Test. Current Deliverability Test and Future Deliverability Test – and all must be passed before any surplus can be ascertained. The first test estimates remaining established reserves, setting aside 25 times current domestic demand plus authorized exports thereby determining current reserves surplus. The second and the most constraining test, determines the maximum annual deliverability from established reserves minus Canadian demand and authorized exports, with the provision that the demand requirements be met for a minimum period of five years. The final test examines an annual deemed surplus of established reserves plus reserve additions over expected domestic demand plus authorized exports for a period of 10 years. The most recent NEG estimate of western Canadian reserves of marketable gas is 75.6 esajoules (EJ)1, far below the comparable figure of 97 EJ from the conservative Geological Survey of Canada (GSC)2. Combining these factors and that the NEC projects a doublln9 of demand between 1985 and the year 2000, they conclude that no gas surplus Exists in Canada although Alberta producers are sitting on 12.5 EJ of shut-In gas and exports are almost 1 PJ/day less than authorized levels; the figure used in NEB calculations.