Unconventional gas industry must find new markets: report

Pricing uncertainty, anticipated lower demand from the US, and changing regulatory and fiscal policies are just some of the challenges facing companies looking to invest in and develop Canada's unconventional gas reserves (unconventionals), according to Ernst & Young.

"To hang on to market share and remain competitive, Canadian companies will need to look farther afield for new customers," says Lance Mortlock, Senior Manager in Ernst & Young's Canadian Oil & Gas practice. "While we expect lower demand from the US, Canada is seeing interest from companies that hold a long-term view of the unconventional natural gas sector, including international oil companies, national oil companies and independents - many of them from Asia."

Canada's unconventionals industry is faced with a host of other challenges, including the timing of new pipeline facilities and infrastructure, uncertainty about power stations converting en masse from coal to gas, and questions about the industry's ability to solve environmental challenges.

What's more, overcapacity and high inventories mean North American customers are unwilling to pay higher prices for services.

Canada is currently the largest exporter of natural gas to the US (with an approximately 87% share of US imports of gas, supplying 14% of demand). However, considerable shale gas reserves in the US are expected to slow gas exports from Canada as supply and inventory levels reach their peak.

"Here in Canada, many perceive that the Utica shale formation northeast of Montreal will not only create huge economic growth in Quebec, but also change the flow of gas in Canada, meaning less demand for Western Canadian gas," says Mortlock. "With this anticipated shift on the horizon, Canadian companies should be on the lookout for new long-term customers in markets like Asia where demand is rising. Canada's ability to export this gas is key to our growth."

Companies can also manage ongoing uncertainty by seeking out more joint ventures and partnerships, which help develop unconventional gas reserves by sharing risk and costs with outside oil and gas hungry economies. Continued mergers and acquisitions activity is expected to be driven by juniors struggling to remain profitable and willing to consolidate, especially in cases in which companies are focused on gas and have limited oil interests. More value-chain integration between mid-stream and downstream companies is also likely to help lower intermediary costs and provide market flexibility for price.