While American gas producers have bought into less picked-over pastures than their home United States with their Canadian acquisitions, they have joined a community that faces an increasingly uphill scramble to maintain its productivity. A signal that western Canada has turned a corner, from frontier prospecting days to mature exploitation of familiar territory, surfaced in evidence submitted to the National Energy Board by TransCanada PipeLines Ltd. to support its “fair-return” application for a financial overhaul and increased shipping tolls.

In a separate application this winter to the NEB for an expansion of its facilities in British Columbia, TransCanada predicted gas production in the western provinces can sustain 15% growth to 20 Bcf/d through 2010 from 17.2 Bcf in 2001. In the tolls case, the pipeline indicates its supply expectations are modest by historical standards and can only come true if high levels of drilling seen over the past two years turn out to be a new plateau for field activity.

“There has been significant weakening of Western Canada Sedimentary Basin supply fundamentals over the last 10 years,” TransCanada said in a written submission to the NEB in the tolls case. Public hearings are scheduled to start Feb. 27. The pipeline predicted, “It is highly unlikely that the supply performance of the WCSB over the previous decade will be repeated. WCSB production growth, if any, is expected to be much lower. This is primarily due to the ‘diminishing returns’ from drilling and the production ‘treadmill’ effects.”

The pipeline company maintains that the past year’s stellar Ladyfern gas discovery, in northeastern B.C., stopped well short of proving that gas producers are reviving the overall western supply growth that prevailed during the mid-1980s through mid-’90s, when output nearly doubled. TransCanada pointed to a well-documented acceleration in productivity decline rates of new western Canadian wells. “In 1990, new gas production the equivalent of 1.5 Ladyfern discoveries (of about 525 MMcf/d each) would have been required to offset declining production. In 2000, due to higher decline rates, the equivalent of approximately six Ladyferns would have been required just to offset declining WCSB production.”

TransCanada also pointed to another trend since the mid-1990s towards the western Canadian industry requiring ever greater numbers of new wells to make up for smaller discoveries by each. “In the period 1991-93, 6,000 gas wells were completed and this resulted in an increase in WCSB supply of 3.2 Bcf/d. In the period 1998-2000, 21,000 wells were completed, resulting in a WCSB production growth of only 1.1 Bcf/d. A tripling of gas well completions resulted in a 60% reduction in production growth.”

The expanded size of the 21st Century western Canadian gas industry, led by five-fold growth in exports to the United States into the range of 3.5 Tcf per year, also means that big finds on the Ladyfern scale make much less of a difference to overall performance than formerly. TransCanada told the NEB it “expects that there will be continued high levels of exploratory and deeper drilling.” But the pipeline also believes “new discoveries will have a lot less impact on the future production levels than they would have had in the past.”

The pipeline was reacting to suggestions that its supply outlook is too gloomy, by the Canadian Association of Petroleum Producers and Mirant Canada Energy Marketing Ltd., the top dealer in western Canadian production since taking over TransCanada Gas Services in December. The pipeline maintains it deserves raises in its return and tolls because it faces increased business risks of competition and excess shipping capacity. CAPP, pointing to pleasant surprises and changes in drilling patterns that are still evolving, is standing by a brighter view of western gas supplies that the NEB incorporated into its approval in late 1998 of Alliance Pipeline after a long fight with TransCanada and affiliate Foothills Pipe Lines.

In the Alliance case, the NEB rejected warnings that building another pipeline would be wasteful because the western Canadian endowment of gas resources was showing signs of strain. In approving the new route between northeastern B.C. and Chicago, the board agreed with gas producers that economic behaviour rather than the resource base had changed since the mid-1980s onset of energy deregulation, free trade and volatile gas prices. The NEB observed, “The natural gas market is extremely competitive and both producers and buyers strive to minimize costs in all aspects of their business. Producers now attempt to bring on additional supply capability as required by market demand, rather than developing this capability in advance.”

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