Most of Canada's natural gas output continues to be unearthed from the Western Canadian Sedimentary Basin of Alberta. However, as U.S. operators have proved, shale gas development, which can be developed at lower prices, is ramping up, with British Columbia's (BC) Horn River and Montney shales now holding the most promise to revive the country's dwindling production, Barclays Capital analysts said in a report Tuesday.

Alberta early this year dropped the higher rates in its royalty scheme that it imposed a year ago in part to improve the competition with the up-and-coming gas-rich provinces of BC and Saskatchewan. And the royalty review has revived activity in the province, noted analysts Jim Crandell, Biliana Pehlivanova and Michael Zenker.

"The rig count has grown from last year's lows, and well completions are up as well," they wrote. "But the growth in rig count between oil- and gas-directed activity strongly favors oil so far."

However, Canada is facing "steep gas production declines," said the trio. "From 2006 to 2009 Canadian production had dropped 11%, or 1.9 Bcf/d, with last year alone accounting for half of that decline. Certainly, high royalties have not been the sole culprit -- North American natural gas prices have collapsed as supply growth in the U.S. accelerated beyond what trend-line demand could match.

"The economic recession in 2009 exacerbated the continental oversupply, as it resulted in a sharp slowdown in North American natural gas consumption."

Most of Canada's gas production still comes from the conventional fields and Alberta is the leading province for production. However, output from the Horn River and the Montney shales has begun, with Horn River producers pointing to a potential for 1.7 Bcf/d of output -- or more -- at its peak.

The Montney may hold even more potential, said the analysts. And unlike the Horn River play, the Montney "is well equipped with infrastructure already in place nearby, allowing for year-round drilling."

However, as big as the two unconventional plays are, they still begin from a "relatively small base relative to the size of aggregate Canadian production," noted the Barclays team. Producers first have to overcome declines in existing BC production before attempting to offset declines in Alberta and grow output nationwide, they said.

The declines in the country's gas output are not trivial, said the analysts.

Barclays estimated that gas production in Alberta dropped 850 MMcf/d in 2009 from the previous year, as the gas-directed rig count dropped 46% over the same time, while well completions plunged 59%. "This year, prices have improved marginally and the upcoming royalty change will further help to improve drilling economics. Indeed, gas-directed drilling activity in Canada has started to recover over the past few months, although it remains significantly depressed relative to 2006-07 levels."

Year-to-date, Canada's gas-directed rig count has averaged 140 rigs/week, compared with 119 for full-year 2009. In the past month, noted Barclays, activity has been 65% above the same period a year ago.

The uptick in gas-directed drilling likely will slow Alberta's production declines and the BC shale plays should further help the country's gas production in aggregate, said the analysts.

"However, this will not be sufficient to shift aggregate Canadian production into growth mode any time soon, in our view. We expect Canadian production to decline 0.5 Bcf/d in 2010 and 0.2 Bcf/d in 2011. Lower Canadian output, coupled with strong production growth in the U.S., should translate into lower gas exports from Canada to the U.S. We expect Canadian exports to the U.S. to average 6.7 Bcf/d in 2010 and 6.5 Bcf/d in 2011."

©Copyright 2010 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.