(substituting for & correcting previous story in Daily GPI, April 20)

With natural gas supplies continuing their downward trend, Oklahoma Energy Secretary David Fleischaker said Monday that unconventional natural gas resources and new northern gas pipelines should be a main focus for North American producers going forward.

His comments were echoed by Dr. Carmen Dybwad, a member of Canada’s National Energy Board (NEB), who noted that Canada’s gas potential has an “unclear future.”

Speaking at Ziff Energy’s North American Gas Strategies Conference in Houston, Fleischaker criticized the lack of an energy policy by the United States, but noted there were “many reasons,” both political and structural. But with no look toward the future, America’s “back is against the wall” for oil and gas supplies. “We’re out on a limb…way out on a limb,” he said, referring to the uncertainty of the North American reserve base. The reality of shrinking oil supplies has been known for decades, but he said that conventional gas production shortages also are looming.

What the United States needs to do, he said, is define a “new” energy policy that would shrink the demand rate of growth, increase unconventional supplies and encourage alternatives to hydrocarbon energy. All of that, however, won’t be a simple task.

For instance, Fleischaker said that “oil-rich regimes friendly to America were vulnerable to political upheaval caused by radical fundamental Islamic groups.” And gas-wise, he believes too much emphasis has been placed on foreign imports and not enough on unconventional supplies in this country. “Gas became the fuel of choice” because of its cost and clean-burning capabilities, but as most experts acknowledge, conventional supplies are diminishing across North America.

“When you look at our natural gas reserves, we are working against us because of nature and government regulations, Canada is working against us because it is exporting less gas, and Mexico is not working at all,” he said. But he seemed most concerned about the LNG hype and its future stake in U.S. markets.

“LNG imports will be significant….But we are putting all of our eggs in one basket and that basket is in foreign hands,” Fleischaker said. “An accident would have a devastating effect. If it occurs in the industry’s infancy, it would set a bad standard.” However, the energy chief does believe LNG will do well if the U.S. planners focus on three things: “location, location, location.” He said LNG backers need to “heed the nuclear industry, and stay away from high population zones. It raises the visibility, which leads to delay, which leads to increased costs…”

More focus needs to be centered on northern pipelines, he said. The Mackenzie Delta pipeline from Canada appears to be moving forward, but the Alaskan pipe remains held up, he believes, because stakeholders want a guaranteed floor price. Fleischaker suggested it would be fair to consumers to also provide a ceiling. “In essence this is a costless collar and a fair way to allocate risk….We need a pipeline. It will be uphill and against the wind but it’s time to saddle up and begin peddling.”

Another promising avenue for producers is the unconventional resources in North America, which include coalbed methane, tight sands and gas shale.

“Total non-conventional gas production increased from 2 Tcf/year in 1990 to 4.8 Tcf/year in 1999. Non-conventional resources have grown from 9% to 26% of U.S. natural gas production between 1990 and 2001. And 70% of the increase in Lower 48 gas production came from non-conventional resources between 1986 and 1996.” Most of those non-conventional resources came from the Rocky Mountains, Midcontinent and the Gulf Coast.

Dybwad noted that Canadian gas exports into the United States last year dropped 8% — and she believes there will be little to change that figure going forward. “We have a ‘gap’ challenge,” she said. “If we have 100,000 conventional gas wells plus large projects for the next 10 years, we will still be flat through the end of the decade.” Canada’s gas potential is currently being scrutinized because, she said, there is an “unclear future” for several once prolific supply regions, such as the East Coast and the Western Sedimentary Supply Basin.

“We have a lot of questions,” she said, on the size of the resource bases, exploration successes and the “sizeable investment needed.”

Canada is competing for dollars just like other foreign countries, and producers will go where there is production, she said. “Large investments will be needed for drilling thousands of wells, developing the offshore, gas pipelines, LNG terminals, and we all face global competition for that capital.”

Canada producers have stepped up CBM production, and Horseshoe Canyon currently holds the best potential, Dybwad said. She noted that it currently is producing 50 Mcf/d in CBM, but its potential may be as high as 50 MMcf/d. Also on the horizon are LNG projects, but she was cautious.

“We hear a fair amount about it, but nothing’s going forward right now. The best ‘intel’ we have is that there may be a Quebec facility built by Enbridge that is moving forward, but we’ve gotten no applications,” she said.

More promising is the Mackenzie pipeline, which “is proceeding,” Dybwad said. “Applications are anticipated in mid-2004 for 1.2 Bcf/d capacity, and up to 1.9 Bcf/d.” The “Cooperation Plan” that will provide timelines and process certainty is “holding,” and hearings could begin on the pipe by late this year, “depending on the date of filing…which would provide the first gas in 2009. Aboriginal issues and participation will be a key to the process.”

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