While natural gas prices have recovered to nearly $4.00/MMBtu, the National Energy Board (NEB) Thursday said Canadian gas producers are undertaking minimal drilling activity, as current prices do not cover the full costs of developing most prospects.

In NEB’s “Short Term Natural Gas Deliverability 2013-2015,” the federal regulator found that Canadian natural gas operations appear to be in a “holding pattern” due to low prices, aided by U.S. production, which continues to keep the North American natural gas market “well supplied.”

Further, the board found that Canadian and U.S. operators that switched to developing more profitable oil and natural gas liquids (NGL) prospects from dry gas appear to be producing enough associated natural gas to extend this period of abundant North American gas deliverability. And as in the United States, the growth in NGL supply has reduced liquids prices and is “eroding some of the incentive behind drilling for wet gas.”

Canadian producers “are not earning sufficient returns to attract additional equity investment” with current prices of around $3.00/MMBtu in Western Canada, said the NEB. The board projects annual Canadian gas prices could be C$3.60/gigajoule by 2015 and sustain drilling for liquids-rich gas, which could incentivize some return to dry gas drilling. Canadian natural gas deliverability would fall to 12.5 Bcf/d by 2015, down from 14.0 Bcf/d in 2012, according to projections.

The United States, noted the NEB, averaged 65.6 Bcf/d of marketable natural gas production in 2012, production was up 4% over 2011 and has been growing since 2005. “Increasing U.S. shale gas production is accommodating more of that country’s requirements and reducing the need for imports from Canada.”

The report also warned that producers shouldn’t bank on this summer to boost gas demand as forecasts call for a departure from the above-normal summer temperatures of the last two years. “Record hot summer temperatures over the last two years resulted in high levels of natural gas use for electricity generation and U.S. gas consumption for 2012 set a new record high. However, more normal summer temperatures in the future may lower this key demand component and remove this upward driver in gas prices.”

While gas priced below $4.00/MMBtu has displaced “significant amounts” of coal-fired electricity generation, “it is not clear enough” whether there will be enough switching to boost prices above $5.00/MMBtu, which is the price level the NEB believes is necessary to spark a significant return to natural gas drilling activity. “If unable to retain this demand, natural gas prices may remain between $3.00 and $4.00/MMBtu.”

Another wrinkle in getting Canadian gas drilling back online comes from competition in the Appalachian Basin. The addition of pipeline capacity to deliver shale gas from drilled but previously unconnected wells in the Marcellus Shale in Pennsylvania and West Virginia is bringing forth additional deliverability into an already fully supplied North American market, displacing Canadian natural gas exports in the northeastern United States and some domestic sales in central Canada, noted NEB. Further displacement of Canadian gas also could occur from the developing Utica Shale in Ohio.

The NEB said the natural gas market has organically recalibrated itself in the past by either reducing exploration and production in an oversupplied market or raising prices and increasing operations when demand outpaces supplies, but the current cycle has a few more challenges. In addition to producing associated gas in pricier oil or NGL projects, the NEB said the sheer size of the shale gas opportunity encouraged industry to lease large acreages of land for future development, thereby creating the need to undertake widespread drilling and production to hold the leases.

There is also no quick fix for significantly increasing North American gas demand, the NEB said. Proposed liquefied natural gas (LNG) export facilities could provide large new gas demand, but they involve long lead times to obtain approvals, establish overseas markets and construct facilities. Other potential sources of major demand growth also are available, but they would also require years or decades to further develop to any meaningful scale, such as petrochemical industry capacity expansion from overseas locations, and widespread use of compressed natural gas or LNG to displace diesel and gasoline in transportation markets.

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