Canada’s National Energy Board has sent a message toparticipants in the international natural gas trade: Stay cool andgreet predictions of Canadian supply shortages with healthyskepticism.

The warning is the bottom line to the latest in an annual seriesof market assessments by the NEB, titled Short-Term Natural GasDeliverability from the Western Canada Sedimentary Basin 1998-2001.The board projects that the expanded Canadian pipeline grid willrun 91% full during 2001, with traffic averaging 17.1 Bcf/d. Bythen, the upper limit will be 18.8 Bcf/d. But the NEB says forpractical purposes, the grid will run at capacity by acceptedyardsticks of the pipeline sector, making due allowances fortechnical and market variations.

Although short of the maximum conceivable amount, the 2001Canadian sales projection spells a gain of 12% from the 1998average of 15.3 Bcf/d.Exports to the United States are expectedto continue accounting for about 55% of the gas traffic originatingin Canada. The board notes and sets aside fears raised by someprivate market analysts that the producer community will strainitself and Canadian supplies trying to keep up with the pipelinecapacity. The board rejects predictions that the pace of drillingwill have to skyrocket to 8,000 wells per year in western Canada-a48% increase beyond even the record 5,400 gas well completions in1994. The new report suggests such alarmist forecasts only work ifthey assume that the industry sticks to the drilling targets-cheap,shallow, small and rapidly-depleted reserves-that were favored bylow prices owed to the old shortages of pipeline capacity. Theshortage projections are rooted in drilling patterns established inperiods when bottled-up surpluses drove Canadian prices into afire-sale range of C$1/Mcf (US68 cents). They have tripled since,thanks to continuing pipeline expansions.

The NEB observes that hard-times wells into shallow plainstargets in southwestern Saskatchewan and eastern Alberta can takeonly a day or two and cost as little as C$75,000 (US$50,000) each.These achieve peak initial output of only half an MMcf on reservesof half a Bcf, then suffer annual productivity decline rates of33-35%.

But Canadian producers have a wide range of targets to matchmarket conditions, the NEB points out. For C$500,000-$2 million(US$333,000-$1.3 million) each, medium-depth and -cost wells incentral and northwestern Alberta, and in the plains region ofnortheastern British Columbia, yield 1.2-2 MMcf/d on reserves of1.2-4 Bcf then lose productivity at a rate of 18-35% per year. ForC$1-$10 million (US$666,000-$6.7 million) apiece, deep, high-costwells in the Rocky Mountain foothills of Alberta and B.C. onaverage yield production 2.5-5 MMcf/d on reserves of 3.9-7.3 Bcfand have annual productivity decline rates of 23%-25%.

The shift to drilling in more prolific areas located in thehigher-cost western regions, while not yet a stampede, is clearlyunder way by high-profile drillers such as Poco-BurlingtonResources, Chevron Canada, Ranger Oil, Canadian 88 Energy,Paramount Resources, Berkley Petroleum and Anderson Resources. Theboard calculates that with more prolific wells the Canadianindustry can keep its pipelines running at capacity with a drillingpace of about 5,000 wells per year.

The NEB acknowledges that “clearly natural gas producers will bechallenged” to keep the pipelines full, and “this challenge will beexacerbated” by lingering after-effects of the 1998 slump in oilprices. “Notwithstanding this, the challenge is expected to be metby producers,” the NEB concludes. “Moreover, an extraordinarydrilling effort, as predicted by some industry analysts, will notlikely be necessary; rather, a gradually increasing drilling effortfrom current levels will result in sufficient deliverability tomeet expected average demand.”

But there will still be plenty of excitement with volumes,prices and field activity bouncing around as market conditionschange. The NEB predicts, “Of course, spikes in demand willcontinue to occur primarily due to weather conditions. These spikesare expected to be met by gas storage and-or the drilling of gaswells in addition to those required to meet average demand.”

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