Benefits of Quebec Shale Gas for Ontario Not a Certainty

October 2010

• Shale gas in Québec has the potential to further diversify and bolster the supply pool for Ontario and lower costs for consumers.
• However, Québec's emergence as an important local supplier of natural gas is still far from a certainty for a number of reasons including lack of infrastructure or a labour pool for operations in fossil-fuels and environmental concerns over the practices used to produce shale gas.

While much of the development in Canada's shale gas industry is occurring in western Canada, events in eastern Canada may be just as important, if not more important, for consumers in Ontario. The Utica shale deposit in southern Québec has been estimated to contain up to 4 trillion cubic feet (TCF) of recoverable gas. Although this amount pales in comparison to estimates for recoverable gas in other eastern North American shale gas deposits such as Marcellus in the Appalachian Mountains (estimated at 262 TCF in 2008) and Antrim in Michigan (estimated at 20 TCF in 2008), Utica's proximity to Ontario's markets may help it to gain relevance in Ontario.

From Ontario's point of view, the realization of Utica's output has the potential to further diversify and bolster the supply pool for Ontario and lower costs for consumers.

The eastward shift in supply sources is already underway with TransCanada PipeLines and Union Gas offering Ontario customers the ability to take deliveries of gas from producers in the US Northeast, who are tapping into Marcellus shale. It's quite conceivable that producers in Québec could also view Ontario as an export market for its natural gas. Development of natural gas supplies within Québec could lead to decreased demand for gas from traditional suppliers in Alberta. However, all else being equal, this would increase unused capacity on the TransCanada PipeLines mainline, leaving an ever-smaller number of shippers to bear the fixed costs of using TransCanada's infrastructure.

Québec’s emergence as an important local supplier of natural gas is still far from a foregone conclusion. Québec has been blessed with an abundance of hydroelectric power, enabling electricity to dominate fossil fuels even in markets such as residential space heating. This has meant that it has not developed infrastructure or a labour pool for operations in fossil-fuels to the same extent as other regions. Québec has also traditionally prided itself on its environmental consciousness, and fossil fuels - even natural gas - are seen as less green and less acceptable than hydroelectricity. Any shale gas producer in Québec thus faces high set-up costs for importing machinery and specialized labour and the economic promise or benefits (e.g., royalties, new employment) from Québec shale gas deposits is countered by worries over the environmental effects of extracting shale gas. For example, in some areas of the US Northeast, people living near shale gas operations have accused drillers of using practices that impact the water supply. Environmental groups and citizens in Québec are understandably wary given such experiences.

In face of the low current prices for natural gas, the high cost of operation in a non-traditional gas production area like Québec, and public resistance on environmental concerns, producers are now beginning to postpone additional drilling or exploration activity until conditions improve and some of the issues can be addressed.

Shale gas in Québec may eventually become a factor affecting natural gas prices for Ontario consumers. But for the time being it appears to be at a disadvantage when compared to established areas of shale gas production in western Canada and throughout the US.

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