EDITOR’S NOTE: This article by Robert Hansen is reprinted by permission from Palantir Solutions. For further information, visit www.palantirsolutions.com.

The global economy is moving toward a gas-powered economy. This is being driven by several reasons:

• Lower prices of the commodity relative to the current alternatives (oil, gas, nuclear, renewables etc.);
• Abundant supply from new extraction technologies;
• Global access to markets through new transportation technologies; and
• Cleaner burning fuel leading to public support due to environmental effects.

This change is happening at a relatively slow pace right now and we can expect the transition to last somewhere on the order of 25 years. Historically, the Canadian gas industry has only had two potential markets, the domestic Canadian market and the US export market. The only way that demand in these markets can increase faster than supply is through government involvement through incentives and regulation, or through industry taking a lead in the conversion of vehicles and industrial assets to the use of natural gas.

One way that industry could do this is to use the natural gas as a fuel or feedstock to drive industrial processes in North America. Low gas prices could be an incentive to develop industries such as the production of fertilizer and petro-chemicals, both of which use natural gas as a feedstock. Both of these products are marketable to Asia and Europe; as refined products, and more of the value chain would stay in North America. Another “refined” product that could be created from natural gas is electricity.

Canadian natural gas could be used to generate electricity that could be sold into the US grid. Currently the US is the greatest consumer of exported Canadian gas. But the US potential gas reserves dwarfs the Canadian, and hence the Canadian gas industry risks losing market share to domestic US sources as their production increases.

To mitigate this risk, Canadian gas will need to find a way improve efficiencies to compete in the with the US shale gas industry in the biggest regional market. But with the two industries so intertwined this seems highly unlikely. That means that the only other option for the Canadian gas industry is to find alternative markets.

With the advancements in LNG shipping, such that the transportation of natural gas is now economic in a liquefied state, these markets can now be opened up to Canadian producers. The first step to this is the building of LNG plants, which would take advantage of arbitrage opportunities. West Coast facilities would take natural gas from North America at a sale price of approximately $4/mcf to the Asian Pacific markets at a sale price of $10+/mcf, and East Coast facilities would supply European markets, which currently have sale prices of the order of $8/mcf.

As long as transportation costs can be controlled, there exists a significant arbitrage to be captured by early adopters. This would increase short-term demand while the global economy transitions to a gas-powered economy and domestic demand increases.

The impact from this will be an increase in domestic natural gas prices, and hence better profits at home, but potentially delaying the onset of the natural gas economy due to higher prices slowing conversions.