The storms were too far away to even have names, but their aftermath — an exceptionally snowy winter in northern British Columbia and Alberta — contributed to a slippage in Canadian natural gas supplies.
The wet and muddy spring legacy of the unnamed northern blizzards sent drilling rigs scurrying for dry land, bringing an early end to a Canadian field work season that was also slowed by industry spending cuts in response to soft gas prices.
The BC Oil and Gas Commission hoisted a yellow caution flag over the entire Peace River Basin, home of some of the Canadian industry’s biggest drilling and development plays.
“All areas of the province [BC] continue to have above- or well above-normal snow packs. The Peace River Basin is well above normal — 130% — for snow pack,” the commission warned. “This means there is severe flood potential.
“Any extended period — five days or more — of well above-normal temperatures, and/or a period of heavy rainfall during the spring, generally in mid-May to mid-June, will be sufficient to produce high river flows and likely flooding in some areas.”
The commission directed gas producers to ensure they have emergency response plans and to train their operations personnel in reactions to damage to roads, pipelines, wells or processing facilities. Field operators were also told to keep ice or other potential blockages out of drainage facilities such as culverts on industry roads, and to monitor the volume and quality of water flowing off melting snow on drilling and production sites.
Similar warnings were broadcast across northern Alberta, where last winter also arrived early and stayed exceptionally long. Late snowstorms continued well past the official start of spring March 21 as far south as Edmonton in the central area of the province, where the North Saskatchewan River remained clogged up with ice and the latest white onslaught hit April 9-10.
The result has been a drop in industry activity to a six-year low. As of April 10, only 108 rigs were still drilling across western Canada or just 12.5% of the fleet of 863. At the tail end of the 2005-06 northern work season there were still 236 rigs on the job.
The activity lull is showing up in slippage of western Canadian gas supplies, as tracked by Calgary energy investment houses FirstEnergy Capital and Peters & Co. The extent of the dip depends on who counts exactly what indicator when, but the analysts agree it is substantial.
Monthly average western Canadian production declined by 200 MMcf/d to 12.6 Bcf/d in March, estimated the analysts at Peters. The slippage also shows signs of accelerating. As of early April gas field receipts on western Canadian gathering pipelines were down by 314 MMcf/d from the same time last year.
The slippage is masked in April by an annual peak in regional production, brought on by connections of wells completed during each winter. The Peters investment house estimated April field receipts at 12.8 Bcf/d, up from March but nevertheless notably down from April of 2006.
FirstEnergy, using its own observation points in the gas production and delivery system, calculated total marketable supply from western Canada averaged 16.89 Bcf/d in March, down about 260 MMcf/d from the same month last year. The firm estimated April supply is down by about 400 MMcf/d, leaving the annual Western Canadian seasonal peak at 17.07 Bcf/d.
FirstEnergy also circulated an appeal throughout the industry for support in developing a Canadian counterpart to the storage reporting system of the U.S. Energy Information Administration. North of the border the market relies on informal cooperation with private data collection, and FirstEnergy warned that this has been falling off. Reliable data will become increasingly critical for commodity traders and equity investors if gas markets continue to follow their apparent trend towards an ever tighter balance of supply and demand, the financial house suggested.
“All indications are the supply situation is going to get worse before it gets better,” FirstEnergy said in a research note to the financial community. Drilling appears likely to stay slow by standards of recent years as producer budget cutbacks limit the Canadian industry’s annual summer recovery from its traditional spring slow season.
“We fully expect that the year-over-year losses in natural gas supply will start to accelerate from the range of 0.3 to 0.4 Bcf/d toward 0.6 Bcf/d by high summer. Even greater declines are possible,” FirstEnergy said.
In the longer run, both Alberta investment houses see the deterioration of western Canadian supplies contributing to a price recovery on the international gas market followed by a revival of producer spending and rig work. Drilling activity is also projected to stay high by historical Canadian standards due to natural decline of aging gas fields. Widely noted trends include continuing reductions in the average initial productivity of new wells, followed by more rapid depletion of smaller discoveries.
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