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Wellhead Freeze-Offs Cut Canadian Production

A severe fall cold snap gave natural gas markets a chilling foretaste of the next year in Canadian supplies by freezing about 10% of production over the past fortnight, industry analysts say.

Pipeline receipts dropped by about 1.5 Bcf/d when minus-30-degree temperatures, amplified to minus-40 or worse by wind chill, turned water vapor in field gathering facilities to ice, FirstEnergy Capital Corp. calculated. Denver-based consulting firm Bentek Energy, which tracks gas flows on interstate pipelines, said Canadian exports to the United States plummeted to 5.8 Bcf/d last Sunday and were 6 Bcf/d or lower for at least three days. Last month the average was 9 Bcf/d. For the month of November, exports to the U.S. were down 23% from levels in November 2005 to an average of 6.9 Bcf/d.

Operations were expected to return rapidly to normal as the two-week bout of misery across Alberta and northern British Columbia ended on the last day of November at near seasonal averages in the minus-teens to 20s. Gas exports to the U.S. rose back up to about 8.2 Bcf/d on Nov. 30, according to Bentek's data.

But over the next 12 months a combination of mid-2006 price lows, self-inflicted "hyperinflation" in field costs and rising domestic consumption are forecast to have similar effects on western Canadian productive capacity.

In releasing an annual reserves review, the Canadian Association of Petroleum Producers (CAPP) painted a picture of an industry learning to pace itself. Gas exploration and production is behaving much like Alberta and B.C. drivers when winter arrives. They do not slow down much, but severe cold and deepening snow take the edge off their aggression.

After tripling spending in the past 10 years, the Canadian industry predicted it will coast through 2007 still running near its record pace, but off by enough to affect supply development.

"It's not a foot on the brake," CAPP vice-president Greg Stringham said in an interview. "Foot off the accelerator is what we expect over the next year."

Western natural gas inventories grew last year by the most since 1995, thanks to improved exploration and production technology as well as vigorous drilling. Additions to reserves topped output by 22%. Total Canadian inventories rose to 57.9 Tcf, up 2.5 Tcf.

Aggressive drilling also more than replaced oil pumped out of conventional western Canadian wells last year for the first time since 2000. Additions to reserves exceeded production by four%.

But the oil side of the industry also sent a message to gas markets. Oilsands development, the fastest-growing driver of Canadian industrial gas demand, is relentlessly expanding. Bitumen inventories, or the small developed fraction of Alberta's mammoth oilsands reserves, grew by 16%.

The 2005 supply gains cost a record C$45 billion (US$40 billion) in industry spending on "upstream" exploration and production, or more than triple total expenditures across Canada in 1996.

"The 2005 record level of capital investment is only sustainable in a strong price and responsive regulatory environment," said CAPP chair Kathy Sendall, a Petro-Canada executive.

Regulation has not changed. But shaky gas prices, combined with rising costs of strained oilfield supplies and services, already made the industry back off this year, Stringham said.

CAPP currently predicts industry expenditures will turn out to be C$44 billion (US$39 billion) for all of 2006, or 2% off last year's record pace.

Next year the total is expected to slip again to C$42 billion (US$37 billion) or 6% less than the maximum spending speed hit in 2005.

CAPP field activity projections echo earlier forecasts of a moderating pace by the Canadian Association of Oilwell Drilling Contractors (CAODC) and the Petroleum Services Association of Canada.

CAPP predicts 22,000 wells for 2007, down from an estimated 23,400 this year and 12% fewer than the record 25,150 drilled in 2005.

Only a decade ago, a 10,000-well year was regarded as a boom by traditional Canadian standards. Even at the industry's reduced pace, the average 665 rigs the CAODC expects to be kept busy in the forthcoming winter drilling season exceeds the entire fleet of less than 600 rigs that Canada fielded until the growth wave began in 2000.

The oilsands remain a Canadian growth hot spot. Spending on bitumen production and upgrading projects is rising to C$11 billion (US$10 billion) this year from C$10 billion (US$9 billion) in 2005 and is forecast to total a third consecutive annual record C$12.5 billion (US$11.2 billion) in 2007. Oilsands investment has multiplied about 10-fold over the past 10 years.

Oilsands inventories now in production or being developed by projects in advanced construction stages are 8.6 billion barrels. But that recognized reserves total is still only five% of the 174 billion barrels rated as available using current technology by the Alberta Energy and Utilities Board.

Forecast spending reductions focus on shallow gas and coalbed methane fields in southeastern Alberta and southwestern Saskatchewan, where drilling costs rose to high levels compared to small volumes of new supplies added by each well.

CAPP did not predict supply outcomes likely to result from the moderating pace of drilling. Stringham only voiced hope that reduced demand for rigs and allied field services will at least put a stop to cost increases and possibly prompt a drop in rates as contractors have to start competing for work again. But it all depends on gas prices and the already apparent market recovery could make the comparative lull in Canadian field activity brief, CAPP and CAODC said.

The Canadian industry was startled off of its growth path. Producers keenly felt results of the mild 2005-06 heating season and the recovery of American production from the 2005 Gulf of Mexico hurricanes.

Gas prices dropped below C$4/Mcf (US$3.60) on glutted Canadian markets, backed up by full storage on both sides of the international border, in August, September and October this year. The lows were about 75% below peaks hit last winter and less than half the 2005 Canadian average of C$8.40/Mcf (US$7.56).

Slowed drilling points to a drop in Canadian productive capacity of about 1 Bcf/d, FirstEnergy calculates. The reduction could also swiftly contribute to a price recovery strong enough to restart Canadian expansion, the firm has said in a series of research reports.

The 2005 growth in western Canadian gas supplies was concentrated in northern British Columbia. where the resource is less heavily exploited than in Alberta and new technology is expanding reserves, CAPP said.

British Columbia gas reserves increased by 20% to 12.3 Tcf as of year-end 2005. Much of the rise was due to official recognition, by the British Columbia Oil and Gas Commission then CAPP, of gains generated by improving well completions and three-dimensional seismic survey technology.

Alberta's inventory slipped by about 2% to 41 Tcf as new drilling replaced only four-fifths of production.

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