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 new report by the National Energy Board

The “mid-range case,” the outlook rated as most likely to happen by an updated NEB gas forecast through 2011, calls for a 2.7-Bcf/d reduction in Canadian deliverability to 13.5 Bcf/d and a 0.7 Bcf/d jump in domestic demand, primarily by thermal oilsands extraction projects in Alberta.

In a “low case,” seen as conceivable if prices stay poor while industry costs remain stubbornly high, production shrinks by nearly another 1 Bcf/d to 12.6 Bcf/d. Even in the NEB’s most optimistic “high case,” built on a more bullish view of economic conditions, Canadian productive capacity shrinks to 14.3 Bcf/d from the current 16.2 Bcf/d.

Like the anticipated growth in oilsands plant fuel demand, which is built into the market by projects already under way, 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. As of Sept. 1, the number of active drilling rigs in western Canada was down to 1999, or less than half the 412 that were busy on new wells at the same time a year earlier, the NEB pointed out.

Alberta’s annual average supply decline rate is expected to hit 9% over the period through 2011. Unconventional production of shale gas is projected to grow in northern British Columbia and spread to eastern Quebec, but it is still in early stages and is not expected to be strong enough to offset the Alberta decline.

Even after provincial royalty reductions designed to offset glutted gas markets, the NEB observes that industry participants believe prices will have to about double from their current lows into a range of C$6-7/gigajoule (GJ) — US$5.67-6.62/MMBtu — to generate a recovery in conventional drilling.

“Natural gas supply costs in Canada are reported as having declined by at least 8% to 20% from peak levels in 2008 as a consequence of severely reduced activity levels,” the new forecast acknowledges. “However, the reduction in costs has been outpaced by the decline in prices.”

The NEB also observed that “additional factors may contribute to keeping North American natural gas prices below” the threshold of a conventional drilling revival.

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 areas in the south,” the NEB said. “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. The introduction of this deliverability in response to strengthening prices could moderate any upswing.”

Also hanging over the Canadian and U.S. markets alike is the ever-present possibility of increasing global supplies of liquefied natural gas (LNG). LNG tanker traffic is poised to increase this year and in 2010 “as several new liquefaction projects begin operations and some existing projects return to service following maintenance outages,” the NEB said. “Should global natural gas demand not increase from current levels, any potential increase in LNG delivered to North America would further add to the supply-demand imbalance.”

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