Canadian 'Giants' Playing Out; Smaller Finds, Coalbed Gas Ahead

A five-fold increase in drilling discoveries will eventually be needed if Canadian producers are to keep up with expanded markets for their natural gas, according to a just-completed supply review that comes virtually from the horse's mouth.

The tall order emerged from a review by the Canadian Gas Potential Committee, which is largely composed of retired regulatory and producing industry executives and senior consultants. Before publication the results are submitted to peers at E&ampP companies for cross-checking.

The committee - led by Roland Priddle, retired chairman of the National Energy Board - stressed that its findings do not amount to an alarmist warning that Canada is about to run short of gas. Instead, the need for more drilling successes is a natural result of historical and technical trends, reported consultant Robert Meneley.

Aggressive marketers and expanding pipelines have expanded outlets and demand for Canadian gas at the same time as the production sector has begun to run out of big, easy finds.

In the modern western Canadian gas industry's first half-century since the Second World War, 59% of production has come from early bonanza discoveries of 341 giant "class 1" pools exceeding 53 Bcf of reserves each and holding a total of nearly 84 Tcf of marketable supplies. The committee's analysis of 82 gas-bearing geological formations or "plays" suggests that only 120 such giants remain to be discovered, will be tougher to find and and will yield just 16 Tcf.

To keep up with demand approaching or exceeding six Tcf per year in the decades ahead, the committee says the Canadian industry will have to turn to much smaller "class 3" pools. They have less than 11 Bcf of marketable gas each. There are so many of them that they could yield about 46 Tcf of marketable reserves. But the class 3 finds are so small that it will take 190,000 discoveries to tap their full potential.

The gas committee calculates it will take up to 5,000 discoveries of western Canadian gas pools per year to keep the industry running at the accelerated pace hit in the late 1990s, a pace expected to increase again in the early 2000s due to pipeline expansions. Exports continue to drive the growth, with sales to the United States that now nudge three Tcf per year due to jump again to fill a TransCanada expansion and the expansion-extension of the Foothills-Northern Border system that will add about 1.1 Bcf in daily capacity this heating season then the 1.3-Bcf-per-day Alliance Pipeline Project starting in late 2000.

Meneley, a veteran of 43 years in the industry, said "petroleum companies will have to drill many more gas wells each year in western Canada."

The gas potential committee's findings show the requirement for increased activity is already being registered by drilling results. While successes are still plentiful, they are becoming smaller. Since the 1970s, when newly discovered gas pools averaged about four Bcf of marketable reserves, the finds have tapered off in size to about one Bcf each.

The committee makes no estimate of just how many more wells will be required in the future. "There is not a one-to-one relationship between numbers of wells and discoveries," Meneley said.

So far, Canadian production companies have consistently achieved big bangs in gas results for their drilling bucks. Over the past 10 years, the western Canadian industry has achieved an annual average of about 1,000 discoveries while drilling 500 gas-exploration wells.

Meneley explained that new finds of gas pools are still often made by development wells aiming only to extend known reserves, and as an unintended byproduct of oil drilling. Canadian gas wells also often achieve multiple discoveries by tapping several new pools stacked at different depths in various geological layers.

Committee member Richard Procter, retired chief of the oil and gas arm of the Geological Survey of Canada, said "this is not a message that we're running out of gas. The message is, the industry is changing." He said the changes should include tapping astronomical reserves of gas in coal seams that carpet the Canadian West - and sooner rather than later, in the interests of supply security and Canada's reputation for reliability. The commitee estimates the western Canadian coalbed methane total at 135-261 Tcf. The National Energy Board recognizes 8Tcf of coalbed methane as economic under current prices and technology.

Procter said "one concern we have is that we don't see sufficient activity in coalbed methane." A specialist in the field, Ken Sinclair, observed that coal seams have been entered by about 10% of the 300,000 conventional wells drilled to date in western Canada. Many are expected to yield coalbed methane if new technology being developed by a consortium of companies and government agencies is used. But the Canadian industry has only spent about C$30 million (US$21 million) on research into coalbed methane and produces none. Sinclair pointed out that in the United States, where conventional gas supplies began dwindling long ago, about $4 billion has been poured into coalbed methane and it accounts for 8% of production.

Marketers and industry analysts, meanwhile, suggest the committee's report confirms a happy outlook for prices for Canadian gas. All the findings point to a tightening supply, especially as the new pipeline capacity opens up. Soft oil prices are forecast to contribute to tightening gas supplies by restricting revenues available for switching drilling targets.

Producers and traders are betting heavily now on price increases in the coming heating season. The Calgary investment house of Peters &amp Co., a leading specialist in the energy sector, observes that early fall has been marked by sharp increases in cash gas prices in Alberta. Between Oct. 7 and Oct. 14, prices at the AECO C trading hub jumped C$0.39 (US$0.27) per Mcf to C$2.80 (US$2).

The analysts say the Canadian price increases are being generated by traders and producers taking advantage of an arbitrage opportunity to buy now for storage, then sell at higher prices expected to develop in the heating season. An estimated 25 Bcf of storage capacity remained available as of mid-October.

Gordon Jaremko, Calgary

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