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Prepared Witness Testimony The House Committee on Energy and Commerce
Natural Gas Supply and Demand Issues
Full Committee on Energy and Commerce
Mr. Harold N. Kvisle
INTRODUCTION Good morning, Chairman Tauzin, Congressman Barton, Members of the Committee. My name is Hal Kvisle. I am the President and CEO of TransCanada Corporation (TransCanada). Last month, TransCanada announced the purchase of the remaining share of Foothills Pipe Lines Ltd. (Foothills) it did not already own. Once Canadian Government approvals required for the transaction are in hand, TransCanada will own 100% of Foothills. TransCanada and Foothills have a longstanding interest in the development of northern gas and welcome the opportunity to participate in this proceeding. Foothills is the owner of the Canadian section of the Alaska Natural Gas Transportation System (ANGTS or Alaska Highway Pipeline) and joint owner with TransCanada of the Alaskan segment. Foothills holds the certificates awarded by the Government of Canada to construct the Canadian portion of the Alaska Highway natural gas pipeline project. The Prebuild portion of the ANGTS was constructed in the early 1980's to transport surplus Canadian gas to the United States. The Prebuild pipeline has been expanded several times over the past 20 years. It currently has assets of US$1 billion, a total capacity of 3.3 Bcf/d and it transports approximately 30% of total Canadian gas exports to the United States.
Foothills' eastern leg runs from central Alberta eastward to a point on the Canada/U.S. border where it interconnects with Northern Border Pipeline Company to serve gas markets in the Midwest. Foothills' western leg extends from central Alberta to a point on the Canada/U.S. border where it interconnects with Pacific Gas Transmission to serve gas markets in California and the Pacific Northwest. TransCanada is a leading North American energy company. It owns one of the largest natural gas transmission systems in the world - over 24,000 miles and has operations and facilities extending across Canada and into the northern United States. TransCanada transports approximately 75% (5 tcf/year) of western Canada's natural gas production to markets across North America. TransCanada also manages or controls more than 4,100 MW of electric generation in Canada and the United States.
TransCanada is headquartered in Calgary, Alberta, Canada. Its shares trade on the Toronto and New York Stock Exchanges. TransCanada has 2,400 employees and total assets of US$14 billion. Our 2002 net income was approximately US$500 million. ASSESSMENT OF OVERALL NORTH AMERICAN SUPPLY AND DEMAND TransCanada expects the growth in natural gas demand in North America to outpace supply from traditional gas sources over the next decade necessitating new gas supply from frontier basins. We believe that natural gas from the Mackenzie Delta in Canada's north, Prudhoe Bay gas from Alaska and liquefied natural gas (LNG) are all required in the next decade if North America is to have acceptable gas prices. Natural Gas Demand TransCanada forecasts total demand in the U.S. and Canada to grow by 18 Bcf/d in the ten-year period from 2002 to 2012. The adjacent chart highlights Canadian growth of approximately 3.7 Bcf/d or almost 50% over this timeframe. This dramatic growth in Canadian gas demand will require new supply sources to permit western Canadian gas to continue to serve its traditional markets. The three U.S. regions that are served by Canadian gas exports will increase their gas demand by 7.6 Bcf/d or approximately 25% in this same timeframe. The remaining 7 Bcf/d of demand growth will occur in the southern United States.
The significant growth in Canadian gas demand is focused on western Canada and is primarily driven by substantial industrial demand growth in Alberta from oilsands and heavy oil development. This chart highlights the components of Alberta gas demand over the next decade.
The Alberta oilsands have recoverable reserves of 315 billion barrels. Oil production from the oilsands is expected to grow dramatically over the next decade. This increase in oil production will replace declining conventional oil production in Canada and provide a secure and growing source of oil for North American markets in the long term. The oilsands produced 0.8 million barrels per day in 2002. This production is expected to nearly triple to 2.3 million barrels per day by 2015.
Achieving this increased oil production, however, is an energy-intensive process. It will consume approximately 1.5 Bcf/d of additional natural gas to extract the oil from the oilsands, produce in-situ heavy oil reserves and provide the necessary electricity generation for that region. The adjacent map illustrates the current, or expected new oil sands or heavy oil sites in northeastern Alberta near Fort McMurray over the next decade. Many of these new projects are producing or under construction.
There are several critical uncertainties that would affect our forecast of North American natural gas demand. Long-term growth rates of the U.S. and Canadian economies, the level of oil prices, and the relative price of natural gas to other fuels could all have a significant impact on natural gas demand over the next decade. The current uncertainties in the power sector, the effect of environmental policies such as the Kyoto Protocol in Canada and the conventional natural gas supply response will also affect gas prices and demand. Supply Currently, there are some concerns that inadequate natural gas supply could cause sustained high gas prices and negatively impact the North American economy over the long term. TransCanada expects that gas supply from traditional U.S. and Canadian natural gas sources will grow by approximately 5 Bcf/d from 2002 through 2012, leaving a gap of more than 13 Bcf/day to be filled by new sources of supply. Without new gas resources, natural gas prices could be expected to rise high enough to restrict gas demand, thereby balancing the market. We forecast both sources of Arctic gas coming on-stream by 2012 - Mackenzie Delta gas from northern Canada in late 2008 and Prudhoe Bay gas from Alaska in late 2011. Significant new LNG will also be required; beyond the capacities of the existing four LNG terminals.
The chart above indicates that the Rockies, the Gulf Coast and the Western Canadian Sedimentary Basin (WCSB) are the only traditional exploration basins expected to increase their gas supply over the next decade. The relative growth in the Rockies is significant, with much more modest growth rates in the Gulf Coast and western Canada. More than 5 Bcf/d from northern Canada and Alaska is required by 2012, as well as an additional 7 Bcf/d of LNG to balance the market and bring gas prices back to US$4.00 per MMbtu and keep them in that range.
Western Canadian gas production increased more than 50% in the 1990's, but has leveled off post-2000 despite a significant increase in wells drilled and connected. More than 10,000 wells are expected to be drilled per year going forward to allow western Canada to maintain and modestly increase its natural gas production. The increasing maturity of the basin and the annual depletion of approximately 3.5 Bcf/d necessitates high levels of drilling each year. This same situation exists in the Lower 48 gas basins. The modest increase of 1.2 Bcf/d in western Canadian production from 2002 to 2012 is clearly insufficient to meet the expected growth in Canadian gas demand of some 3.7 Bcf/d over this period, let alone provide any additional supply to meet U.S. demand. Natural gas production from conventional sources in western Canada is at, or is approaching, its peak and is forecast to begin a significant decline within a decade.
Unconventional sources, primarily coal bed methane, are projected to begin to make a contribution to western Canadian gas supply over the next 10-15 years. Unconventional supply from western Canada should be approaching 2 Bcf/d by the time that Alaskan gas is in-service. Gas from Canada's North will be available this decade to partially meet the growth in demand in western Canada.
Natural gas production from Canada's East Coast near Sable Island has currently plateaued at approximately 0.5 Bcf/d. Our projections have this growing to nearly 1 Bcf/d by 2010. Significant uncertainties in the near term exist with regards to the specific timing of new production from Canada's East Coast.
Total natural gas supply from traditional sources in Canada and the United States will be insufficient to meet projected growth in gas demand, in our view. Natural gas from frontier basins in Alaska and Canada's north are required within a decade to supplement new LNG supplies to ensure North America has competitively priced natural gas. ALASKA GAS PROJECT In the late 1970's, Canada and the United States signed an Agreement on Principles (a "treaty") to govern relations between the two countries for the transportation of Alaskan gas to market. After a protracted competitive regulatory process, the Government of Canada passed into law the Northern Pipeline Act to effect the terms of this treaty. The Northern Pipeline Act awarded Foothills Pipe Lines Ltd. the certificate for the construction of the Canadian portion of the Alaska Natural Gas Transportation System along the Alaska Highway. The Canadian Government also established the Northern Pipeline Agency as a single window regulatory body to oversee the construction of the pipeline in Canada. Changes in the North American natural gas supply/demand balance postponed actual construction of the pipeline from Alaska. Over the past 25 years, the governments of Canada and the United States have maintained the pipeline treaty. The Government of Canada and Foothills have maintained Foothills' certificate to construct the Canadian portion of the pipeline. The Northern Pipeline Agency continues as the regulatory body to oversee the construction in Canada. Foothills' certificates to transport Alaskan gas across Canada remain valid today. Foothills pipeline through Canada can connect to a pipeline in the State of Alaska constructed under the Alaska Natural Gas Transportation Act or other U.S. legislation. In 1981/82, Foothills used its certificate to construct the Prebuild pipeline to transport available Canadian gas to U.S. markets in advance of the startup of Alaskan gas. Utilization of the Foothills system through Canada under the Northern Pipeline Act provides regulatory structure and certainty for Alaskan gas, as no new legislation or regulations are needed in Canada. It is the most expeditious and preferred means to advance the Alaska pipeline project within and across Canada. The Foothills Prebuild system is integrated with the existing western Canadian pipeline grid. Construction of the Alaska project in Canada under the Northern Pipeline Act will ensure utilization and optimization of existing infrastructure, and provide market diversity for Alaskan gas east and west of the Rocky Mountains. The Canadian gas infrastructure currently has approximately 2 Bcf/d of spare capacity, and we forecast there will be significant spare pipeline capacity at the time Alaskan gas is delivered to market. The Alaska project is expected to initially transport 4.5 Bcf/d. Integration of the project into the existing infrastructure will reduce the capital costs and cost overrun risks for a new project, reduce regulatory risks and minimize environmental and other societal impacts. All of these benefits are available for Alaskan gas by using the existing Canada/U.S. treaty, existing Canadian legislation (the Northern Pipeline Act) and integration via Foothills with the existing North American pipeline grid. As is evident from our supply/demand testimony, Foothills and TransCanada believe that Alaskan gas is needed soon to meet North American gas demand. We believe that using the Foothills system under the Northern Pipeline Act in Canada will expedite the Alaska project, avoid a new round of negotiations between the U.S. and Canada and provide maximum benefits to both countries. Routing With respect to overall northern natural gas development, Foothills and TransCanada believe that broad stakeholder interests are best served by a two-pipeline solution to move Mackenzie Delta and Prudhoe Bay natural gas to market through two separate pipelines. TransCanada has been actively engaged to make a stand-alone Mackenzie Valley pipeline a reality. The Mackenzie Valley pipeline proponents are expected to file a preliminary information package with Canadian regulators soon, with a formal application to follow late this year. Based on our own in-depth engineering study, TransCanada's and Foothills'assessment is that the Alaska Highway route continues to be the most economic, least risky and most timely route to transport Alaskan gas to market. An over-the-top route has serious, uncontrollable weather risks, technology and environmental issues, all without a cost advantage. The Prudhoe producers also concluded one year ago that the capital cost for an Alaska Highway route was approximately the same as an over-the-top route. With the over-the-top risk issues, the Canadian certification for the Alaska Highway route in hand, and the State of Alaska opposing an over-the-top route, TransCanada and Foothills do not consider over-the-top as a viable route option. The Mackenzie Valley project is proceeding on its own at this time and is currently on target for an in-service date of late 2008. Gas from Prudhoe Bay could be delivered to U.S. markets via the Alaska Highway pipeline by late 2011. The market has chosen the two-pipeline strategy. CONCLUSIONS Conventional sources of natural gas are not expected to be sufficient to meet expected growth in natural gas demand in North America over the next decade. Either new gas sources must be connected, or alternative fuels at competitive prices must be proven quickly, or gas prices will rise to mute demand growth. TransCanada and Foothills believe that the frontier gas sources already discovered in northern Canada and Alaska can be connected on competitive terms in this timeframe to meet market demands. Construction of two pipelines from Alaska and northern Canada will spur additional exploration for natural gas in those regions. This will provide additional supply for North American consumers, beyond the already substantial proven Arctic gas reserves. Mackenzie Delta gas is expected to be in-service in approximately five years. This gas will primarily serve growing demand in western Canada and will therefore permit conventional western Canadian gas to serve its traditional markets in Canada and the U.S. Alaskan gas can be in-service by 2011 by moving along the Alaska Highway and across Canada under the existing Canada/U.S. treaty and the Northern Pipeline Act using the Foothills system. Significant benefits are available by integration with the existing North American pipeline grid in Alberta. TransCanada and Foothills have been engaged in developing the transportation infrastructure for northern gas for almost thirty years. We have never wavered in our belief that both Alaskan and Mackenzie natural gas will be needed by the North American economy. TransCanada and Foothills have patiently maintained, since the 1970's, both the Alaskan and Canadian transportation projects and clearly intend to continue to play a central role in developing the most efficient transportation system for northern gas. Thank you for this opportunity to present our views on the North American supply and demand picture and, particularly, northern gas from the Canadian Arctic and Alaska.
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