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Oilsands Downturn Supports Canadian Gas Exports

More Canadian natural gas will stay available for export longer than previously expected as expansion by the nation's formerly fastest-growing industrial consumer, Alberta's oilsands, slows.

"The Alberta oil rush is likely to be characterized as the Alberta oil slumber for the next few years as development stagnates," the Canadian Energy Research Institute (CERI) says. The prediction follows a review of dwindling activity in the province's Florida-sized, 142,000-square-kilometer (56,880-square-mile) northern bitumen belt.

Stalled oilsands expansion is a recipe for increased Alberta gas supplies on national and international markets. On average, thermal oilsands extraction and processing systems use about 0.5 MMBtu for every barrel of output. But some operations burn 1.2 MMBtu or more. High gas consumption is especially pronounced in newer production areas where deposits are too deep for open-pit mining and wells are drilled for injecting clouds of super-hot steam from gas-fired plants to achieve underground separation of oil and sand.

Since about 2003, oilsands industrial gas consumption has been forecast to about triple into the area of 2 Bcf/d by 2015. Although new methods and technology were expected to achieve efficiency improvements, the gains were projected to be at least partially offset by steadily increasing in-situ underground extraction.

Less than one-fifth of Alberta oilsands deposits are in the richest veins, shallow enough to mine from within about 70 meters of the ground surface. The quality of deeper deposits is highly variable, contributing to a wide range of gas consumption by underground extraction operations.

Until recession and falling energy prices overtook bitumen belt expansion programs, the availability of gas from Alberta was forecast to drop sharply with oilsands production growth making a strong contribution to the trend. About four-fifths of Canadian gas still comes from Alberta, with volumes from British Columbia's budding shale drilling still unpredictable and expected to take a few years to build.

Expectations of a sharply shrinking role for Alberta on the international gas market showed in forecasts done for a provincial liquid byproducts inquiry, which released its report Feb. 4.

Alberta gas available for out-of-province sale was projected to drop by 57% to 3.9 Bcf as of 2022 from a current 9.1 Bcf/d. Consumption within the province was forecast to more than double to 4.5 Bcf/d in 2022 from a current 2.1 Bcf/d.

The oilsands accounted for the lion's share of the anticipated Alberta gas consumption increase. Industry consensus forecasts anticipated bitumen belt consumption growth of about 1.9 Bcf/d by 2022.

The consensus outlook has done an abrupt about-face. There are no precise predictions yet, but the changed oilsands outlook means the next forecasts are bound to restore at least a substantial part of that gas to supplies available for export to the United States and the rest of Canada.

Apart from projects nearing startup or already in advanced construction stages, almost every entry in a long lineup of bitumen extraction and synthetic crude upgrader projects called time-out as oil prices dropped 70% last fall. After jumping by 130% to 1.3 million b/d over the previous 10 years, oilsands production is expected to flatten by virtually every industry analyst and participant.

CERI, a quasi-official agency supported by Canadian governments as well as an industry foundation, says, "the era of grand announcements for oilsands projects is over. A more measured pace of development will take hold, with the current leases and projects being developed at a slower pace and with more manageable costs."

The pause began well before oil slid from its peak of US$147/bbl last July to its current $40 trading range due to shortages and rapidly escalating costs of labor and materials. Industry leaders such as Canadian Natural Resources Ltd., Petro-Canada and Husky Energy deferred development decisions and sent projects back to the drawing boards after cost estimates more than tripled in four years to C$100,000 (US$81,000) or higher per barrel of oilsands synthetic crude production.

CERI drastically lowered its production expectations and highlighted the inability of forecasters to come up with any reliable estimates other than to say growth is bound to slow. CERI's oilsands output prediction has dropped from a mid-2008 projection of 3.4 million b/d by 2015 and 5 million by 2030 to as little as 1.9 million b/d in 2015 and 3.7 million in 2030.

Crude prices will have to rebound to more than US$70/bbl to restart the oilsands rush, the institute predicts. Even if the global economy and oil markets rebound in 2010, "it will take another two years before oilsands production growth resumes," CERI estimates. "It takes at least two years for most mining and in-situ projects to start production after construction begins. However, many projects will not start construction in 2010 but will begin a reassessment and refinancing period that could take several years."

CERI's new forecast suggests C$218 billion (US$177 billion) will eventually be invested in the oilsands. But the projected total is lower by C$97 billion (US$78 billion) or 30% than expectations that prevailed before the global credit crisis and energy price erosion.

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