Government observers in Ottawa, convinced the North American market has entered an era of tight supplies and high prices, anticipate a steady rise in the value of Canadian natural gas as far ahead as their computer projections can see.

The latest annual state-of-the-industry report by the natural gas division of Natural Resources Canada projects annual Canadian plant gate or producer netback revenues of C$51 billion (US$39 billion) by 2015 — more than double the 2002 total of C$24.7 billion (US$19 billion).

The anticipated gains result from strong prices rather than any return to the growth in productive capacity and sales volumes, domestic or in the United States, that were consistent themes of the Canadian industry since the onset of deregulation and energy free trade in the mid-1980s.

The price drop of 2002 is expected to turn out to have been a once-only departure from the upward trend. The projections anticipate Canadian gas fetching an average US$3.61 per MMBtu in 2005, US$3.95 in 2010 and US$4.40 in 2015. Domestic prices are expected to track exports as a result of integration of Canadian and American markets as well as continued availability of enough pipeline capacity for gas to flow freely across the border.

“The producing industry in both Canada and the U.S. seems to be fundamentally different than it was in the 1990s,” the Canadian energy department’s gas experts said. Among the changes, “the era of major export-oriented natural gas pipeline expansions, such as Alliance, appears to be over.”

For the first time, the government forecasts incorporate deliveries from the Arctic via the proposed Mackenzie Valley pipeline. But the new northern supply source — starting in the 1 Bcf/d range as early as 2009, the current target date set by the project sponsors, and growing to 1.6 Bcf — is expected to be a case of maintaining rather than expanding overall Canadian productivity.

Annual net exports to the United States are expected to turn out to have peaked in 2000 and ’01 at 3.5 Tcf. While the projections raise the possibility that the peak may be approached again, the general trend is forecast to be gently downwards into the range of 3.2-3.3 Tcf per year.

Canadian domestic demand is projected to rise by nearly 40% into range of 4 Tcf per year by 2015, supported by imports expected to average 250 Bcf. The projections point out that three Canadian companies are proposing LNG import terminals: TransCanada PipeLines, Irving Oil and Access Northeast Energy.

The Canadian government observers said “in previous versions of this report our export forecast began with assumptions about export pipeline capacity, then applied increasing load factors on that capacity to yield rising exports. This year we can no longer use that methodology, as it is clear that exports are now limited by supply rather than by export capacity.”

Major unknowns on the Canadian scene continue to include the fledgling supply development of coalbed methane. Like other agencies such as TransCanada PipeLines and the National Energy Board, the government regards the area as speculative and makes no firm predictions.

The pioneer in the field, MGV Energy Inc., a Calgary subsidiary of Fort Worth-based Quicksilver Resources Inc., continues to stand out as more optimistic about it than the gas and regulatory establishment. The company says its inaugural effort in the Palliser area of southeastern Alberta is performing. Production averaged 15 MMcf/d in third-quarter 2003 and the drilling program has been increased to 186 wells from an initially planned 176. The coal in the region is virtually dry, and Quicksilver says five new developments are planned in 2004 in similar deposits a short distance to the north.

Alberta Energy Minister Murray Smith acknowledged the MGV success and high levels of interest emerging among larger Canadian producers that have drilled about 500 trial wells over the past two years. “I’ve gone from being a coalbed methane skeptic to a coalbed methane advocate,” Smith said.

“We don’t yet understand the exact reservoir conditions so we don’t know how much of the resource can be developed into economic reserves, but the total gas in place is estimated at over 500 trillion cubic feet,” Smith said. The provincial government is developing a coalbed methane policy, but it focuses on technical and environmental issues rather than financial help.

Although royalty reductions have been suggested as a Canadian counterpart to 1980s and ’90s U.S. coalbed methane incentives, they are not currently in the cards. The Alberta energy minister pointed out that coalbed methane automatically gets a break already because its wells qualify as small-volume producers that qualify for reduced rates regardless of the geology involved.

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