The Horn River and Montney shale plays in British Columbia — like their counterparts in the Lower 48 — have a productive future, but their bright outlook is overshadowed by steep declines in conventional Canadian production due to maturing fields and substantial cutbacks in drilling, according to analysts at Barclays Capital.

“The majority of Alberta’s gas comes from conventional fields that are well into their mature years and require significant new well additions to offset declines from existing production,” the Barclays analysts wrotein a Tuesday research note. “Drilling in Alberta started to lag the level needed to generate production growth in 2007, and output has fallen by a cumulative 1.7 Bcf/d since 2006. This year Alberta’s production averaged 0.7 Bcf/d lower than during 2008 for the period January through August.”

But the Montney and Horn River plays are the bright spots in Canada’s gas industry. “Unconventional gas has large potential in Canada, with the Horn River alone possibly exceeding 1.7 Bcf/d of production at its peak…However, this growth is a long-term target and would take years to achieve.”

So for now Alberta’s production declines tell the story for Canada overall as gains and losses in other provinces roughly offset each other, according to the Barclays team.

The good news for producers is that production declines are strengthening AECO basis relative to Henry Hub. The Barclays team said AECO basis risk is skewed to the upside with AECO prices strengthening relative to Henry Hub. “We expect AECO basis to average minus US70 cents/MMBtu in 2009 and minus US50 cents in 2010,” they wrote. This compares with an AECO differential to Henry Hub during 2008 of minus US$1.48/MMBtu, they noted.

“Despite the expected strengthening of Canadian basis relative to the U.S., any rebound of drilling activity in Canada is likely to lag that of the U.S. in 2010,” the analysts wrote. “Our forecast for Henry Hub prices to average $5.05/MMBtu in 2010 does not provide for sufficiently strong prices to rekindle development of Canada’s vast conventional reserves.”

The Barclays team isn’t the first to note the impact of low commodity prices and dramatic drilling declines on Canada’s natural gas outlook. The Petroleum Services Association of Canada earlier this month released a forecast that only about 8,000 wells will be drilled in 2010. The outlook calls for a repetition this year, with severely depressed activity across Western Canada stagnating at one-third of the record 24,666-well level set in 2005 (see Daily GPI, Nov. 9).

©Copyright 2009Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.