Describing operations in picked-over natural gas fields at home as a case of “managing decline,” Canada’s seventh-ranked producer has set out to expand in international liquefied natural gas development in order to maintain and increase sales to the United States.

But within days of describing the strategy to investment institutions, Petro-Canada and the rest of the Canadian industry heard warnings that the hard part of the strategy will be making sure deliveries of offshore LNG can be increased into the U.S.

The fear is compounded by the fact that just last week TransCanada Corp. and ConocoPhillips announced suspension of work on a proposed LNG terminal on the coast of Maine after the community affected, Harpswell, voted against granting the companies a site (see related story).

At the same time, the Canadian industry heard from a U.S. federal official that would-be LNG traders can expect to run into the same problems as TransCanada and ConocoPhillips everywhere on American coastlines — and especially in the populated areas where the gas is most needed.

Michael Moore, chief economist of the U.S. National Renewable Energy Laboratories in Golden, CO, said in an Edmonton interview “LNG…may not be as accessible as we think.” He visited the Canadian fossil-fuels heartland of Alberta to court co-operation with the oil, gas and coal establishment. Moore expects renewable forms such as solar, wind, biomass and hydrogen to take 50 years to capture even a 25% share of North American markets. He described the new-wave sources as playing a complementary, stabilizing role on the energy scene rather than as replacements for the fossil fuels.

His pitch to the oil and gas establishment encourages it to adopt a portfolio approach that uses renewable energy forms as supplements both to extend the lifespans of older resources and make markets more resilient against supply and price shocks. Moore said a wider view also has to be adopted in the public sector by establishing connections between energy and land use regulators.

He suggested that local authorities need to be made responsible for taking energy needs into account because private property owners can be relied upon to resist all industrial projects, including plants to make environmentally desirable fuels. But excluding such political considerations, LNG looks increasingly attractive to Petro-Canada.

The company’s vice-president for North American natural gas, Kathy Sendall, described its results in its traditional mainstay gas fields as disappointingly typical of overall performance by the Canadian producer community. Despite record drilling, production is flat to declining because the Western Canadian Sedimentary Basin is “maturing.” Last year Petro-Canada fell short of adding enough reserves to replace all its 2003 daily average production of about 800 MMcf/d.

As a result, this year the company expects its gas output to slip by about 8%. In western Canada, shallow plains drilling has become a case of increasing numbers of wells into ever smaller reserves while deeper, more productive targets along the foothills of the Rocky Mountains are more costly and take longer to develop.

The overall trend is not changing, observed FirstEnergy Capital Corp., which makes a specialty of tracking gas-field productive capacity as a leading indicator of commodity and share prices. “Despite drilling levels that are at all-time highs and many forecasts expecting a record number of natural gas completions to take place in 2004, the supply response in western Canada natural gas production has been non-existent to date,” the Calgary investment house said after surveying results of all the activity.

As of February, field receipts by western Canadian pipelines were 15.9 Bcf/d, FirstEnergy reported. That was an improvement of 215 MMcf/d, or 1% from 15.7 Bcf/d in February of 2003. However, that number was still 597 MMcf/d, or 4% less than the region’s output of 16.5 Bcf daily in February of 2002. The record may turn out to be somewhat less bleak than it looked in early March because the industry is still thawing out frozen wellheads that sharply cut production when a severe cold snap hit the region in January, FirstEnergy added. Petro-Canada is not waiting for statistical details because it regards the Canadian production trends as reasonably clear.

The company’s vice-president for international operations, Peter Kallos, said “another area of growth we are considering is expanding our Atlantic Basin LNG operations, marketing into North America.” Petro-Canada has examined 30 established and planned regasification terminals, and has a short list of four or five projects where it wants to participate or else contract capacity as a means of securing supplies, Kallos said.

Offshore gas production is also being sought. Kallos said Petro-Canada has had encouraging results from a 17% minority interest in a production project operated by British Gas in Trinidad and Tobago. The development, known as North Coast Marine Area 1, began deliveries under long-term contracts as of Jan. 1. Petro-Canada said the U.S. spot market has turned out to be strong enough to market additional volumes with spot sales through the year. Additional drilling acreage is being sought in Trinidad, and Petro-Canada is also looking into gas opportunities in Venezuela, Kallas said.

The shrinking size of reserves tapped by new wells in western Canada means gas finding and development costs in the region are rising towards a point where LNG is a competitive target for producer investment, Sendall said. She added that the trends have reached a point where western Canadian gas producers have to challenge conventional wisdom about their home region: “Can we assume that rising commodity prices will compensate for the higher costs of finding and developing new reserves? We believe there is some risk in that assumption.”

Petro-Canada estimates that LNG can yield a minimum 10% rate of return at prices of US$3.50 to $4.50 per MMBtu landed in the U.S. “There is ample evidence that LNG imports will significantly penetrate the North American market by the end of the decade, and if we fail to recognize this we run a real risk of longer-term overcapitalization (putting too many eggs in the western Canadian basket),” Sendall said.

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