"We hate it when our friends become successful," lamented Morrissey.
Canada's energy industry likely shares the gloomy British singer's sentiment.
Canada sits just across the border from the world's largest oil and gas market, and its biggest ally. But successful development of US shale resources is spoiling it all. Alberta's oil firms suffer steep discounts already as they try to sell into a glutted US market, not helped by opposition to the Keystone XL export pipeline.
Now, Canada's natural-gas sector is getting squeezed by its neighbor's newfound riches.
Historically, the northeastern US sucked in gas from the Gulf Coast and Canada, especially during winter. For example, New York state imported a net 892 billion cubic feet from Canada in 2007, according to the Department of Energy. But the region's Marcellus and Utica shale basins are upending this. In 2011, the last year for which data are available, New York state took just 286 billion cubic feet from Canada.
Tudor, Pickering, Holt & Co. projects that by 2020, the Marcellus shale will produce 20 billion cubic feet a day—equivalent to about 30% of the entire country's gas output last year. With normal weather, TPH estimates the Marcellus can meet the Northeast's gas demand for one-third of the year. By 2016, that will rise to 70%; by 2020, more than 90%. And that doesn't count gas coming from the Utica shale.
In the past, gas heading into New York City might cost a multiple of the benchmark Henry Hub price on days of very high demand. The growing glut increasingly will push northeastern prices below the benchmark. This is akin to the persistent, if volatile, discount at which West Texas Intermediate and Western Canadian Select oil, trapped in the Midwest or further north, trade versus Brent crude these days. And, similarly, producers suffer while consumers benefit.
With oil, the benefits flow to those building pipelines and refiners processing cheap oil into gasoline sold at world prices. With northeastern gas, some pipeline operators will again benefit. So will gas-fired power-plant owners able to burn cheap fuel and sell electricity at a decent profit. Private-equity firm Panda Power Fund's purchase in August of the Liberty project in Pennsylvania was predicated on this. The gas glut also should benefit local households.
Producers in the Northeast, though, will want to sell as much gas as they can in other markets. Sending it overseas as liquefied natural gas is one option, but that remains years off. The likelier option: "Export" gas to the Midwest and southern US—and Canada. That would push Canadian gas out of its traditional US export markets and bring US gas north to compete across the border.
Alberta accounts for two-thirds of Canadian gas production. Gordon Pickering, a director at Navigant Consulting, says the situation for western Canadian energy producers is "very dire."
In a report he prepared supporting the proposed Jordan Cove project in Oregon to export Canadian gas as LNG, Navigant projects net exports of gas from the country by pipeline to drop to less than 3.5 billion cubic feet by the end of the decade, from about five billion a day now.
Shale is often touted as the key to energy independence for North America. That won't stop rivalry within it, though—and Canada's best customer is rapidly gaining the upper hand.
