With the writing on the wall for declining conventional supplies, Canada’s top natural gas-producing jurisdiction has become a convert to coalbed methane, vowing to push its exploitation beyond its prolonged infancy stage.

Alberta’s Conservative administration, in its new budget for the 2004-05 fiscal year starting April 1, promised “the government will actively encourage the extraction of coalbed methane.”

The province has yet to make known exactly how it means to help advance the fledgling specialty beyond its current contributions of less than 100 MMcf/d to Canadian supplies. Experimentation with the resources stretches back to the 1970s.

A possibility was raised of royalty incentives to gas producers, although coalbed wells already qualify for special reduced rates in an industry-wide class of low-volume facilities. More emphasis was placed on assistance for development of the technology and on providing a suitable regulatory regime.

Long a subject of interest only among specialists in Canada, coalbed methane has moved to the government’s front burner since it became apparent that conventional supplies have peaked and may be entering decline. The Alberta Geological Survey has estimated that coal seams which carpet much of the province could harbor up to 500 Tcf of new reserves, and an array of research and technology initiatives is under development.

While leaving details to come together in co-operative work between government and industry agencies, the province clearly showed the strength of its vested interest in maintaining its stature as the source for about four-fifths of Canadian gas production.

Gas accounts for 70% of provincial royalty revenues, the provincial energy department’s 2004-05 business plan observed. Oil and gas royalties, in turn, were nearly 30% of total provincial revenues in 2003-04. The province netted C$5.4 billion (US$4 billion) last year on gas, which is charged royalties in a range of 20% with variations reflecting price and technical aspects of production. A change in annual average gas prices of C10 cents (US7.5 cents) causes a swing of C$105 million (US$79 million) in Alberta royalty revenues.

Alberta oil royalties, by contrast, have been slipping even though production has been increasing. A new generation of high-cost sources, led by the oilsands, has been developing with help from incentives that hold royalties down to token levels often as low as 1% until project costs are paid, including a return equal to long-term interest rates. A change in annual average oil prices of US$1 per barrel makes a difference of C$65 million (US$49 million) to the provincial treasury.

“Natural gas revenues…are expected to decline over the next decade as production declines,” the energy department said. “To counter these declines Alberta will need to increase production from non-conventional energy sources . . . royalty regimes will need to be reviewed to ensure they continue to secure an appropriate share for Albertans while continuing to attract new investment. Pressure to develop both existing and new energy resources will result in an increased need to resolve conflicts with other land uses.”

Nothing in the Canadian industry’s performance lately has changed the outlook, according to FirstEnergy Capital Corp., a Calgary investment house that tracks gas deliverability as a leading indicator of commodity and share prices. The firm estimates Canadian gas production slipped 2.7% in 2003, led down by aging Alberta fields where record drilling has fallen short of adding to supplies. “Our expectations for 2004 are for flat Canadian natural gas production.”

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