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Analyst: Shale Plays May Not Cover Conventional Declines in 2010

Production growth from shale plays and the return of production that had been lost in last year's hurricanes have been masking a decline in North American conventional natural gas production, but they may not be able to continue to cover those declines in the short term, according to ARC Financial Corp. chief energy economist Peter Tertzakian.

While Canadian production volumes are down about 1 Bcf/d this year -- not including production that's been shut in -- and production and rig counts are down in conventional regions in the United States as well, shale gas has been able to backfill the decline, Tertzakian said.

"Behind the scenes it's been an almost seamless substitution of a high-cost product with a low-cost substitute, all facilitated by new technology applied on a large scale."

Beyond 2010, Tertzakian said he expects shale gas and other large-scale unconventional gas plays to be increasingly dominant and able to offset conventional production declines. But the gap may not be so easily bridged in the shorter term, he said.

"The billion-dollar question for 2010 is whether or not unconventional gas production in now-legendary plays like the Barnett, Haynesville, Fayetteville, Woodford, Marcellus and even Canada's Montney, to name a few, will be able to collectively respond fast enough to offset estimated conventional declines in 2010 of 5 Bcf/d in the U.S., plus another 1 Bcf/d in Canada. Theoretically it's possible..." but economic and logistical constraints could put a lid on unconventional production through 2010.

"Next year it's quite possible that only half of the expected 6 Bcf/d of conventional losses in North America will be replenished. It's a scenario that speaks to benchmark continental prices rising above US$6/MMBtu again, all else being equal."

A combination of a colder-than-average temperatures, gradual recovery in industrial demand and declining conventional production could tighten supplies this winter, he said.

Depressed drilling and growing domestic industrial demand could knock a whopping 3.4 Bcf/d, or 21%, off Canadian supplies on the international natural gas market within two years, according to a recent report by the National Energy Board (NEB) (see NGI, Sept. 21). Most of the production erosion is expected to happen in Alberta, where aging conventional gas fields that account for four-fifths of Canadian supplies are in natural decline aggravated by sagging drilling, according to the NEB.

At the same time the NEB said there is "potential for considerable amounts of additional U.S. natural gas that could be brought onto the market relatively quickly, such as in the Rocky Mountains and shale gas plays in the south. This includes wells that are currently shut in for economic reasons, awaiting increases to pipeline capacity, or where completion and tie-in operations have been delayed to preserve company finances."

Canadian natural gas exports to the United States fell by 13% in the first two-thirds of the current international contract year, according to the NEB (see related story).

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