Growing industrial consumption, a prolonged spell of poor prices, competition from rising overseas tanker imports and looming Alberta royalty hikes spell accelerating deterioration of Canadian natural gas supplies, industry analysts predict.
Consumption in thermal oilsands extraction is poised to multiply five-fold to 5 Bcf/d through rapid growth over the next 15 years as northern Alberta plants' varying development stages are completed, Peters & Co. calculates.
An emerging change in the type of oilsands activity is expected to more than make up for technical improvements. The industry is increasingly going into "in-situ" or underground extraction with steam-heat injections as it runs out of expansion room in the small minority of bitumen deposits shallow enough and high-grade enough for open-pit mining, the Calgary investment house points out in a research note.
Fort McMurray mines, about 300 miles northeast of Edmonton, which have to date dominated the field use an average 0.7 Mcf of gas per barrel of oilsands production. Gas use averages 1.25 Mcf per barrel of output by a growing chain of in-situ operations across northern Alberta's 56,000-square-mile bitumen belt.
Production is forecast to top three million b/d, possibly by a wide margin if oil prices stay anywhere near their current highs, within the next 10 to 15 years. Gas substitution technologies -- such as bitumen and coal gasification, "fire-flooding," akin to giant underground barbecues burning oilsands ore, and chemical solvents -- remain in pioneer or experimental stages.
Soft gas prices are not helping commercial adoption of the alternatives, nor are environmental issues. Bitumen or coal gasification systems increase carbon dioxide emissions that are coming under growing scrutiny and increasing control in Canada, which has signed the international Kyoto Protocol on curbing output of greenhouse gases blamed for global warming.
Among a growing lineup of oilsands developers, Canadian Natural Resources Ltd. and Suncor Energy Inc. alone are forecast to use a combined 1.6 Bcf/d of gas in little more than a decade. Those are just examples of growing Canadian producers in the field. International industry giants such as Royal Dutch Shell and Total SA are also laying out ambitious oilsands growth programs lasting well into the next decade.
Canadian gas prices will stay depressed, FirstEnergy Capital Corp. predicts. In a fall research report to investors, the Calgary financial house lowered its expectations for this year by 4% to an average C$6.50/MMBtu and by 20% to C$6.48/MMBtu for 2008.
"We suspect that only a significantly colder than normal winter heating season would be able to alter the price-bearish gas balances that we see developing over the next six months," FirstEnergy reports.
Canadian gas prices are expected to continue to lag American markets. While U.S. supplies remain ample, Canadian storage is full, and the Alberta industry can count on increasing competition from tanker cargoes of liquefied natural gas (LNG), the investment house reports.
FirstEnergy points to the new Canaport LNG terminal nearing completion at Irving Oil's New Brunswick refinery, where an expansion is already planned. Projects along the St. Lawrence Seaway through Quebec are in final regulatory approval stages and approaching construction, along with expansions and potential new terminals in the United States.
The outlook is a case of "tough times ahead for Canadian natural gas producers," FirstEnergy says. "Natural gas supply may be headed for a permanently lower production plateau in Western Canada. This potentially lower plateau as a result of the drilling slowdown, and cumulative supply losses that are mounting, is coming at a time when LNG imports into Canada and the U.S. are going to be increasing. This is eroding, and will continue to further erode, the market share held in the United States by Canada's domestically produced natural gas."
FirstEnergy suspects that Canadian gas supplies could drop by 1 Bcf/d or more in 2008 after slipping by about half as much this year.
Proposed Alberta royalty increases will only compound the downward drift by prompting many companies to follow EnCana Corp.'s example of a $1 billion cut in western drilling budgets if the provincial government implements recommendations of a review panel, the investment house said (see related story; NGI, Oct. 1).
Pressure on the government to increase royalties grew when the a recent Alberta auditor-general's annual report said Cabinet-level neglect has allowed about $1 billion per year of royalties to slip through gaps in the provincial treasury (see NGI, Sept. 24).
Political polling, meanwhile, points to highly negative popular reaction against industry threats, such as EnCana's dire warnings, by an electorate steeped in conviction that provincial ownership of natural resources under the Canadian constitution means something (see related stories). The political confrontation over royalties will grow hotter, with the industry launching advocacy advertising and trade association speech campaigns while the Conservative government heads into an election in a matter of months under the party's new leader, Premier Ed Stelmach.
The royalty proposals, which call for increased maximum rates and sensitivity to prices, are potentially "catastrophic" for the gas industry, according to a report by Tristone Capital. Natural depletion of aging fields, currently expected to average about 2.5%/ year by authorities such as the Alberta Energy and Utilities Board, could double to an annual 5%, the investment house predicted.
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