Natural Gas: A Foundation Fuel for Canada Paul Cheliak Senior Advisor CGA Taxation Committee Meeting June, 2010

1

Natural Gas: A Foundation Fuel for Canada

Paul CheliakSenior Advisor CGA

Taxation Committee MeetingJune, 2010

2

Canadian Gas Association

Founded in 1907, CGA is the voice of Canada's natural gas delivery industry

Members deliver gas to 6.1 million homes, businesses and industries

Members include gas distribution, transmission and service providers

3

Overview Natural gas in Canada

Gas in the Energy Mix, Canadian Gas Snapshot, Pipelines, Prices, Supply/Demand, Resources

End use trends Industrial, Residential, Commercial, Power

Generation, Transportation

The policy landscape CGA Policy Initiatives

Energy Framework Initiative Canadian Natural Gas Initiative QUEST

4

Natural Gas In Canada

5

First Canadian well drilled in 1889

Canada is the world’s third largest gas producer and exporter.

Produce 6 Tcf/yr, export 3 Tcf to US markets

Gas provides 25% of Canada’s total energy demand• 48% residential• 45% commercial• 32% industrial• <1% transportation

Export revenues between $20-30 billion/year

Natural Gas in the Energy Mix

Motorcycle Gas Delivery – 1920’s

Canada Energy Use 2007 - by Fuel

25%

22%

43%

10%

Natural Gas

Electricity

RPP's

Other

6

Canadian Natural Gas Snapshot

Commercial

Mid-West

Residential

Industrial

2008 Supply Breakdown

25%

20%

55%

West

East

Power 13%20%

27%

40%

Exports 55%

Dem

and 45%

AB

80%B

C 13%

SE

7%

Note: SE = Sask + East Coast

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Canadian Sales

Exports to US

Production

7

A Reliable Supply Network

• Over 480,000 km of pipeline forms an interconnected North American pipeline network that provides reliable and safe delivery of natural gas.

• Backstopped by storage facilities that can hold 55 days of average daily North American natural gas consumption.

• Market supply:• 78% of supply from US• 21% from Canada• 2% LNG.

North American Natural Gas Supply - 2008

21%

78%

1%

Canada

US

LNG

8

The Natural Gas Market Landscape Prices

• Disconnect between crude oil and natural gas prices since 2005 with gas currently lagging by 50%.

• Gas and coal competing for some market share in electric market

Natural Gas Supply• Shale gas has been a game changer putting gas on the map as a key fuel in

the future energy mix• Renewable natural gas garnering interest

Natural Gas Demand• Stable or declining core and industrial markets• Growing gas in power generation• Growing interest in transportation

9

Changing Prices: Oil and Gas Split Natural gas prices track each other

because of market integration.

Gas to remain an excellent value due to domestic resource abundance

Crude to maintain price premium due to high world demand and tighter supply.

Natural Gas and Petroleum Product Prices ($US/MMBtu)

$-

$5

$10

$15

$20

$25

$30

1994 1999 2004 2009 2014 2019

Sources: NEB, EIA

Natural Gas

RFO

Heating Oil

Crude Oil

Natural Gas Price Tracking Analysis

$0

$5

$10

$15

$20

$25

Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

Soucse: EIA, NEB

$US/

MM

Btu

St. Stephen

Alberta

Louisiana

10

Changing supply/demand portfolio

Supply portfolio becoming increasingly unconventional (20% by 2020) driven by shale and other unconventional gas and the north.

Future demand to be driven by power generation and industrial (oil sands).

New residential and commercial gas users outweighed by furnace efficiency gains.

Canadian Natural Gas Demand to 2020 (tcf/year)

0

1

2

3

4

5

2000 2004 2008 2012 2016 2020

Source: NEB

Residential CommercialIndustrial Electric

Canadian Natural Gas Production to 2020 (tcf/year)

0

1

2

3

4

5

6

7

2000 2004 2008 2012 2016 2020

Source: NEB

Solution ConventionalCBM ShaleFrontier

11

Changing Resource Picture

12

Canadian Gas Balance to 2020

Canadian production falls from 6.5 Tcf in 2000 to 5.8 Tcf in 2020 as conventional fields decline.

Demand grows from 3 Tcf in 2000 to 4 Tcf in 2020 driven by oil sands and electric power.

Residential and commercial demand growth offset by gains in efficiency.

Net exports fall from 3.2 Tcf in 2000 to 1.8 Tcf in 2020.

Canadian Production/Demand/Exports

0

1

2

3

4

5

6

7

2000 2004 2008 2012 2016 2020

Source: NEB

Supply Net ExportsDemand

13

LNG Exports From Canada Kitimat LNG proposal to export up to

0.7 bcf/d by 2014 – equal to 20% of current BC production.

Kitimat has initial upstream (Apache) and takeaway (Kogas) contracts.

The project hinges on success of BC shale gas production and differential between oil and gas.

Henry Hub vs. Japan LNG Prices

$0

$4

$8

$12

$16

Jan-07 Sep-07 May-08 Jan-09 Sep-09

$US

/MM

Btu

$0

$4

$8

$12

$16

Henry Hub

Japan

Sources: Federal Reserve Bank of St. Louis, World Bank

14

Changing Supply Basins

Shales are located across Canada and the US – both in traditional gas areas and areas new to gas development.

Shale basins economic the new low cost basis – 8 fold increase between 200 and 2008.

Shale to grow to 20% of NA gas by 2020 from 10% in 2009.

Maritimes shale – Horton Bluff. Some initial work being done.

15

Changing GHG Emission Objectives

BEFORE220 lbs

AFTER176 lbs2008 2020 Target 2050 Target

16

How Gas Can Help Help meet ambitious GHG reduction targets

• Gas is available, clean burning and efficient

Help re-define power generation • 50% cleaner than coal• Compliment renewable generation

Help provide heat• Very efficient means to provide heat • Very good value

Help as a clean transportation fuel• 25% less emissions than diesel in a heavy duty truck application

Help economy• New production, pipelines, installations, create jobs and royalties

17

Natural Gas End Use Trends

18

Changing Natural Gas Use Trends

Natural Gas Use in Canada

Residential

Commercial

Industrial

Electricity Production

0

500

1000

1500

2000

2500

3000

1990 1994 1998 2002 2006

PJ/y

r

Gas excluding Upstream Mining and Electricity Generation

Residential

Comercial

Industrial w/o Upstream

Mining

0

500

1000

1500

2000

2500

3000

1990 1994 1998 2002 2006

PJ/y

r

1990- 2007 Growth: 43%

1990- 2007 Growth: 12%

19

Industrial Sector Trends

Canadian Industrial Natural Gas Trends

0

200

400

600

800

1000

1200

1990 1992 1994 1996 1998 2000 2002 2004 2006

Source: NRCan, End Use Database

Tera

joul

es

Chemicals Construction FoodMetal Mining Motors/VehiclesOil/Gas Refining Pulp/Wood/Paper OthersUpstream Mining

Upstream Mining 745%

Others 22%

Pulp/Wood/Paper -40%

Oil/Gas Refining 1%

Motors/Vehicles 10%

Mining 8%

Metal 14%

Food 8%

Construction -39%

Chemicals -19%

Total 33%

1990 vs 2007• Increased

industrial gas demand has been driven by increased use in upstream mining (oil sands +745%).

• There have been significant declines in major use sectors (pulp and chemicals).

• Increased energy efficiency and conservation playing a major role as well.

20

Residential Sector Trends

Source: NRCan National Energy Use Database

Space Heating- 6%

Water Heating- 21%

Appliances+22%

Total-11%

Natural Gas Use per Customer 1990-2007

Space Heating

Water Heating

Appliances

0

20

40

60

80

100

120

140

1990 1992 1994 1996 1998 2000 2002 2004 2006

GJ/

yr

• Natural gas meets close to 50% of residential energy demand .

• 70% of residential natural gas use is for space heating, 27% is for water heating.

• Gains in efficiency have led to an 11% decline in per customer residential natural gas use since 1990.

21

Investing in Solutions:DSM and Energy Efficiency

LDCs DSM Expenditures 2000-2007

0.010.020.030.040.050.060.070.080.0

2000

2001

2002

2003

2004

2005

2006

2007

Mill

ion

$

22

Commercial Sector Trends

Commercial Buildings Energy Intensity

0.30

0.50

0.70

0.90

1.10

1.30

1.50

1.70

1.90

1990

1992

1994

1996

1998

2000

2002

2004

2006

GJ/

m2 Intensity – Canada

1.38 GJ/m2

Intensity – Manitoba1.47 GJ/m2

.32 GJ/m2

23

Power Generation Trends

Canadian Power Generation Trends

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1990 1992 1994 1996 1998 2000 2002 2004 2006

Source: NRCan End Use Database

Pet

ajou

les

Other 167.7

RPP -59.1

Natural Gas 345.3

Coal 31.8

Nuclear 9.7

Hydro 24.1

Total 28.4

1990 vs 2007• Power

generation energy demands have increased by 28% since 1990.

• Natural gas use for power generation has increased by 345% since 1990.

24

Transportation Trends

Marine4%

Off-Road4%

Air 10%

Rail 3%

Passenger Vehicles, Light Trucks

50%

Sweet Spot Medium/Heavy Trucks

& Urban Transit & Buses29%

Transportation Energy Use

Marine

Off-Road

Air (Freight & Passenger)

Rail (Freight & Passenger)

Passenger Vehicles, Light Trucks

Medium/Heavy Trucks & Urban Transit & Buses

Source: NRCan End Use Database

• Natural gas is a marginal transportation fuel at this point in time (0.1%).

• Return to base urban and road freight transportation is the area with most potential for natural gas use.

• Diesel represents over 72% of road freight transportation energy use.

25

A Changing Utility

26

The Policy Landscape

27

Policy Landscape for Natural Gas

The Energy Debate• Until recently natural gas was a blank to policy makers except to the extent

that it was a fossil, running out, too expensive, GHG producing

• But new supplies and capacities to produce has sparked interest in gas

• Shift from climate driving energy to idea that if you get energy right the greenhouse gases will follow.

• Think tanks and Senate (Energy Environment and Natural Resources Committee) struggling to find a coherent story and a way forward.

• CGA working with others to tell the positive gas story

CGA working to position natural gas as a fundamental fuel• Energy Framework Initiative• Canadian Natural Gas Initiative (CNGI) • QUEST

28

QUEST

Big Energy Discussion

CNGI

EFI

Less Specific

More Specific

Asks

Principles

Broader Narrower

Principles

Utility of the Future

Asks

CGA Strategic Initiatives - Linkages

29

Energy Framework Initiative (EFI)

Environmental FoundationSocial Foundation

Economic Foundation

Security / Reliability / Affordability / Innovation / Sustainability

An Energy Framework for Canada

Six Pillars of Policy Activity

1. A Commitment to Sustainable End-use of Energy

2. A Commitment to Sustainable Energy Resource & Extraction, Production & Transmission Capability

3. Ensuring a Sustainable Approach to Energy & Climate Change

4. An Ongoing Social License to Build & Operate

5. A Continuous Improvement in Capacity

6. A Collaborative Approach on Intergovernmental Engagement

30

Canadian Natural Gas Initiative (CNGI)

A nation-wide advocacy & communications initiative supported by the natural gas value chain in Canada to:

• develop objective, fact-based educational materials on natural gas;

• raise understanding among decision makers of the role that natural gas should play in achieving Canada’s energy, environmental, and economic objectives; and

• demonstrate that natural gas is a smart foundation for Canada’s evolving energy mix and encourage supportive policy.

• Target audience includes the public and key policy makers.

31canadiannaturalgas.ca | gaznaturelcanadien.ca

CNGI – Website and Brand

32

QUEST: Who and What

QUEST is a coalition for action drawing from a diverse group:

All three levels of Government Energy & Renewable Industries Environmental Groups Developers & Builders Academics & consultants

QUEST Vision: “By 2050 every community in Canada is operating as an integrated energy system, and accordingly, all community development and redevelopment incorporates an integrated energy system.”

33

The Opportunity in Canadian Communities

Communities represent about 50% of Canadian energy use and GHG emissions.

Communities are themselves energy using (and producing) entities.

An integrated approach – energy systems embedded in the community fabric of land use, density, transport, water and waste can deliver GHG reductions .

Just as importantly this creates more resilient & adaptable energy systems delivering safe, reliable , affordable energy services.

In short, a more sustainable approach.

Residential 13%

Industrial 6%

Non-Urban 52%

Transportation 18%

Commercial / Institutional 11%

Canada's Urban Energy Use - 2005

34

LDC Gas Demand by Scenario(Directional)

2010 2020 2030

LDC Gas Demand

GK

SC

WT&FHJ

We Tried & Failed• Weak industrial demand

•Societal pressuresHidden Joules• BAU in ST

• Municipal relationships

Gigawatt Kings• Displace by electricity

• Stranded assets

Sustainable Canada• Major efficiency gains

• Integration opportunities

Gas Demand in Scenarios

35

Regulator Industry Dialogues

The R/I Dialogue has held eight self-financed sessions to-date including: Demand Side Management (4) Carbon Pricing (3), and most recently The Utility of the Future (1).  

Next dialogue is in Vancouver in 2010.

Focus will be on the Utility of the Future Providing new services through energy convergence Operating in a carbon constrained world

36

Gas Value Chain Tax Positions

Supportive Canadian fiscal policy is needed to underpin and stimulate competitive development and transportation of Canadian natural gas supplies across North America.

In General Gas Value Chain seeks a fiscal structure that helps Canadian natural gas supplies compete in the competitive North American marketplace

Ensure similar fees and duties and/or exemptions for gas exports to the US.

37

Thank you