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Natural gas fuels Canada’s economic engine

August 24, 2011

By Dan Sumner
Troy Media

CALGARY, AB, Aug. 24, 2011/ Troy Media/ – Natural gas often flies under the radar compared to its more glamorous and headline-catching partner, oil. But the numbers show it plays a considerable role in the Canadian economy.

Putting an exact dollar value on the size of the Canadian natural gas industry is nearly impossible because it is intertwined with so many other industries and because there are so many indirect effects to account for. However, an analysis of available numbers shows three things: natural gas accounts for a significant proportion of Canada’s exports, it is responsible for much of the exploratory drilling in western Canada, and is responsible for a sizeable percentage of Canadian economic activity.

Canada is the world’s third largest producer of natural gas (behind the United States and Russia) and exports approximately 60 per cent of its production to the U.S. During the mid-decade energy boom, a common perception was that it was primarily an oil boom. While the oil sands played a prominent role, Canadian gas exports were larger than oil exports from 2000 until 2006, and there were more than twice as many gas wells drilled as oil wells.

One guess: $100 billion

A special report prepared by IHS Global Insight for the American Natural Gas Alliance estimated the value of Canada’s gas industry at just more than $100 billion in 2008. Of the $100 billion total, $70 billion is directly generated by the industry and the other $30 billion comes from indirect (industries that supply the gas sector) and induced (income spent by those employed in the gas sector) economic activity.

To put $100 billion in perspective, Canada’s nominal gross domestic product (GDP) was $1.6 trillion in 2008. This would make natural gas ultimately responsible for 6.7 per cent of Canadian economic activity. In Alberta, by far the largest participant in the gas sector, that proportion surges to 28 per cent and in British Columbia and Saskatchewan, gas accounts for roughly five per cent of the economy. While natural gas and its offshoots do directly accrue economic benefits to every province, more than 85 per cent of the value added is in western Canada.

Natural gas is also a large employer. However, because the industry is so capital intensive and has a concentration of higher wage positions, the total number of jobs generated by natural gas is much larger than just those working directly in the industry. The IHS survey estimates 189,000 people were directly employed in the gas sector in 2008 and the industry is ultimately responsible for 599,000 positions, when all the indirect and induced jobs are accounted for.

That is roughly twice the number of Canadians employed in the entire agriculture sector.

Gas helps harvest oil

The majority of Canada’s gas is produced in Alberta but, despite having less than four million people, the prairie province is also the largest user of gas at 39 per cent of the national total. This is largely because vast swaths of the fuel in the oil sands extraction process and to produce electricity.

Ontario is the second largest user at 33 per cent. In terms of uses, Canadian industrial and commercial users account for 60 per cent of national consumption, while residential and electrical generation account for 26 per cent and 14 per cent respectively.

Gas in power generation is growing in popularity as natural gas power plants have become more cost-effective and the environmental concerns associated with carbon emissions (i.e. coal) have moved to the forefront. Around 6.5 per cent of Canada’s electricity comes from gas (although this proportion is much higher in some provinces €“ in Alberta, for example, it’s 40 per cent of total electricity capacity) and it is growing at the expense of coal.

Because production often occurs in remote areas, the industry can give rise to towns that rely almost exclusively on the resource for their livelihood. In western Canada, and particularly in Alberta and B.C., there are numerous towns where, without gas extraction, the restaurants, bars, auto dealerships and various other businesses in these rural regions would wither.

Even in some larger and more diversified economies, such as Calgary, Fort St. John, Medicine Hat and Grande Prairie, many of the finance, retail and transportation industries would diminish in size significantly without the economic activity associated with gas.

Provincial coffers

The importance of natural gas goes even beyond generating jobs and GDP, it’s also a crucial revenue source for Canada’s provincial governments. At the peak of the gas price cycle in 2008 gas royalties provided $6.9 billion to provincial coffers in western Canada, more than the combined amount from conventional oil ($2.4 billion) and oil sands ($3 billion). Although gas royalties have fallen in recent years ($1.8 billion in western Canada in 2010-11, compared to $3.5 billion for conventional oil and $3.7 billion for oil sands), all citizens of western Canada continue to benefit from these revenues as they fund social programs, health care and education.

Despite all these impressive figures and statistics, those with knowledge of the North American gas industry will be quick to tell you it is undergoing a dramatic transformation, and not necessarily for the better from western Canada’s perspective.

Over the last two years, gas prices have plunged from an average of $7.77 per GJ at AECO hub in 2008 to $3.78 in 2009 and $3.79 in 2010, with little price recovery as of yet. As a result, the value of Canadian natural gas exports was sliced in half between 2008 and 2009 to only $16 billion, with exports stagnant at $15 billion in 2010. Exploration activity in western Canada fell to 1998 levels (around 5,000 wells) and the royalties collected in western Canada plunged by two-thirds to $2.3 billion in 2009 and $1.8 billion in 2010. In fact, natural gas royalties for Canada as a whole ($2.0 billion in 2010) are now dwarfed by oil royalties ($9.6 billion for conventional and oil sands combined).

The reason was simple: new technology allowing the low-cost proliferation of U.S. shale gas.

Production of shale gas started to take off in 2006 with the widespread availability of horizontal and multi-stage fracturing drilling, and since then the industry has essentially been transformed. Prior to shale, the United States was estimated to have around 237 TCF of natural gas reserves; today, one estimate by The Potential Gas Committee has pegged the number at a staggering 1,836 TCF.

It is difficult to predict if the shale gas industry will live up to all the hype. But it’s worth noting that 2010 U.S. production reached its highest levels since the 1970s and reversed a 30-year trend of flat production. Some analysts have even predicted the U.S. will become a net exporter within a few years.

Low-price advantage

As is often the case with massive transitory periods, such as the shale gas revolution, there are losers and there are winners.

Many in the gas industry are viewing the lower gas prices as an opportunity. Gas power plants are not only cleaner than coal, but highly economical at current prices. ENMAX, a City of Calgary utility, has begun using gas-fired electrical generation as a marketing tool to attract customers. Low prices are also spawning the possibility of exporting gas to Asia, where prices are significantly higher than in North America. Plans for a gas export facility in Kitimat, B.C., are being entertained and if these plans take hold it could be the beginning of the next transformation in the industry.

Editor’s note: for more on the proposed Liquefied Natural Gas facility in Kitimat, click on this link.

Dan Sumner is an economist with ATB Financial.

Series Navigation<< “Sour” gas sweetens its reputationThe ways to harvest natural gas are getting more unconventional >>

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