CERI Report Supports NEB Conclusion: Canadian Supply Is in Decline

Natural gas markets across North America this week were warned for the second time this heating season against taking for granted any further growth in Canadian gas supplies, at least for most of this decade. The Canadian Energy Research Institute (CERI) said its latest industry survey will confirm a report by the National Energy Board in December that gas field productivity has peaked and stands poised to drop in western Canada (see Daily GPI, Jan. 13; Jan. 21).

CERI Gas Supply Director Paul Mortenson said two-thirds of the Canadian endowment of the resource is still intact, despite the near-doubling of production to more than 6 Tcf/year since the onset of energy deregulation and free trade in 1985. But he signaled an end to the pattern that has included a five-fold growth in exports to the U.S., which now total 60% of Canadian production.

The resource has become harder to exploit due to geological and market conditions. The new data suggests the arrival of the 21st century marked a turning point for Canadian gas supplies. By CERI's count for a forthcoming state-of-the-industry report, 104 Tcf of Canadian gas remains to be found and developed by conventional means for costs of less than C$4.50/Mcf (US$3.10) -- a 17-year supply at current production rates. An estimated 60 Tcf can be had for less than C$2 (US$1.40).

Mortenson added that while the scale of coalbed methane as a new Canadian gas source is still "highly speculative" because production is in its infancy, there is optimism that 70 Tcf will be available. An estimated 21 Tcf can be had for costs of less than C$4/Mcf (US$2.75). A total of 215 Tcf is held to be conceivable eventually if prices go high enough to justify tapping the entire Canadian endowment of gas in coal seams.

Just maintaining current output levels is projected to take an all-out effort by the prevailing standards of industry behavior. Mortenson said CERI's survey of gas investment intentions indicates the Canadian industry will not increase total production or even be able to maintain current levels at least through 2005. Gas output is projected to drop in Alberta, grow in British Columbia and stay steady offshore of Nova Scotia.

By CERI's count, Canadian gas production peaked in 2001 at an average 17.3 Bcf/d. The high was reached as a result of growth in B.C. and the fledgling Sable Offshore Energy Project. Their performances masked a turning point in Alberta, source of 80% of Canadian supply throughout the industry's history to date.

In Alberta, production is believed to have fallen by 500 MMcf/d or 3% in 2001. The energy research institute expects the erosion to continue in Alberta, leaving total Canadian gas production at about 16.4 Bcf/d in 2004 and 2005, or about 5% off the 2001 peak. The projections differ only in detail from the NEB's forecast in its December report, Short-Term Natural Gas Deliverability from the Western Canada Sedimentary Basin 2002-04.

CERI observes that at the same time as low-cost drilling targets become smaller in Alberta's picked over gas fields, gyrating markets make pursuing larger but more expensive prospects difficult. Supplies continue to suffer from the effects of slumps in prices and field activity during 1998-99 and 2001-02.

Mortenson said belief in better luck ahead with prices appears to be firming up and spreading in the Canadian industry. He reported encountering "a sense" that the current price spike will turn out differently than the last one during the 2000-01 heating season. It was followed by a market collapse that drove Canadian prices as low as the C$1-range (US$0.68)/Mcf.

At CERI's annual gas conference in Calgary, industry leaders made it plain that large-scale increases in Canadian gas supplies cannot happen quickly even if prices stay sky-high. The target date for starting arctic deliveries on the proposed Mackenzie Valley pipeline remains late 2008, said Dan Bailie, vice-president for major projects at ConocoPhillips Canada Ltd. The project still has to work its way through protracted aboriginal ownership negotiation, regulatory and construction stages.

Offshore of Nova Scotia, "we need some discoveries," said Dave Collyer, vice-president in charge of frontier programs for Shell Canada Ltd. He recited a series of drilling disappointments with wells costing C$75-$100 million (US$52-$68 million) each by a range of companies with high ambitions. EnCana Corp.'s recent decision to delay development of the last drilling success -- its $1 billion Deep Panuke project -- postponed any additions to Canadian offshore production until at least 2006.

As a partner in the Sable Offshore Energy Project, Shell expects its primarily export deliveries via Maritimes & Northeast Pipeline to stay in the range of 500-550 MMcf/d. Planned drilling and production improvements are expected only to maintain current output. Collyer said drilling results over the next three to five years will be critical for the long-range outlook for gas offshore of the Canada's East Coast. Current exploration licenses largely expire by 2006 and drilling results on them are bound to affect industry attitudes towards making further commitments.

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