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Tackling a new gas equation Canadian industry lobby groups join forces to promote the use of gas for power generation and transportation across North America Gary Park For Petroleum News
The Canadian Association of Petroleum Producers is happy when natural gas prices are high and rising, keeping its member companies profitable and busy.
The Canadian Gas Association likes to tell the world when prices are low — good news for its membership of gas utilities, major consumers and marketers.
The Canadian Energy Pipeline Association just wants the transmission systems of its affiliates operating at capacity and pipeline tolls kept in check.
These disparate organizations have something in common these days.
They’ve teamed up to develop a strategy for increasing the use of natural gas across North America, including power generation and transportation, at a time when supply forecasts are at breathtaking levels.
2,000 trillion cubic feet The United States Potential Gas Committee recently put the supply estimate at 2,000 trillion cubic feet, enough to meet current U.S. needs for 95 years and up 60 percent in only four years because of rapid development of shale deposits.
The Canadian National Energy Board has forecast that shale plays and coalbed methane in British Columbia and Alberta could contribute 65 tcf to the remaining marketable resource base, while frontier gas could add another 225 tcf to that inventory by 2020 and beyond.
The trio of industry organizations is preparing a case that North America has abundant natural gas and needs to open up new markets by expanding the demand for gas.
It’s a follow-up to a joint statement in June by CAPP and the U.S. Natural Gas Supply Association stressing the importance of gas as a low-carbon energy source and a means of securing North America’s energy future.
NGSA President R. Skip Horvath said at the time that gas is a “sustainable fuel of the future. That’s already a reality and contributing significantly to our energy mix.”
CAPP President David Collyer said that despite tough economic times for gas producers the “long-term outlook and resource potential remains strong and reinforces Canada’s role as the number one exporter of gas to the U.S. market,” which relies on Canada for 15 percent of its needs.
He said technological advances continue to shrink the environmental and ecological footprint of gas.
Lowest prices since 2002 In the last two months, the grim near-term outlook has become even worse, with prices sliding below $2 per gigajoule, the lowest level since 2002, and predicted by FirstEnergy Capital to nudge $1 or lower.
“The market is trying to rationalize all of the gas that is piling up and there are fewer and fewer places to put it,” said analyst Martin King. “We expect that a $1 handle on prices will start becoming more common in the next few weeks.”
FirstEnergy said shut-ins — already spreading among cash-starved smaller producers — may soon range from 500 million to 800 million cubic feet per day “for a short period of time for some kind of balance to be achieved in this market.”
“If this does not occur, then protracted extreme price weakness is likely in store for the middle to late part of September to prices below $1.”
Prices have been on a sharp descent over the past year, accelerated by the economic recession along with surging supplies from liquefied natural gas producers and the new resource play fields.
Long shut-in may be needed Two months ago, Bill Gwozd, vice president of Calgary-based Ziff Energy Group, said a production shut-in of several weeks might be needed to reduce chronic oversupply and stop a giveaway.
With prices at $3.85 per million British thermal units at that time, he estimated the marginal cost of bringing new gas into production was about $9.
A Ziff study in June found the cost to find and develop new gas averages $3.85 per thousand cubic feet, while full-cycle cost (taxes, finding and development, operating, interest, general and administrative costs and royalties) is $8, although a moderation in those costs is believed to have trimmed the full-cycle costs to $7.
Gwozd said a “fair” price of $7-$8 would enable cost-effective producers to maintain production, provide adequate returns for shareholders and ensure sufficient supplies for consumers.
An increasing number of producers have embarked on shut-ins in recent weeks, but Ziff Energy Chief Executive Officer Paul Ziff said many more should turn off the valves with gas selling at 5 percent of the equivalent price of oil.
He said producers are “not making any cash flow and some are actually losing cash by producing.”
The Alberta Energy Resources Conservation Board’s latest statistics estimated 6,437 gas wells were not producing in the first quarter of 2009, down 5.5 percent from a year earlier, while 111,192 wells were producing at March 31. But the shut-ins could be for several reasons.
The major shut-ins due to lower prices are by EnCana (up to 400 million cubic feet per day), Paramount Energy Trust (20 million cubic feet per day) and Canadian natural Resources (10 million cubic feet per day).
Encouraging a switch In this grim environment, the three Canadian industry associations plan to start spreading a message among Canadians and policymakers about the stunning change in gas supplies, only five years after growing concerns about the outlook.
The alliance is still assembling information to support its argument, including recommendations on how to build gas demand.
The CGA has developed a number of studies, including a recommendation that Ontario, with a population of 13 million, should turn to gas-fired generation and shut down coal-fired plants that currently produce 18 percent of the province’s electricity.
It also sees an opportunity to use gas for residential and commercial space heating and for hot water. Currently gas is the fuel source for 25 percent of residential heating and 20 percent of commercial heating.
Bryan Gormley, the CGA’s director of policy and economics, said making that shift could be more challenging in the U.S., where 50 percent of electricity comes from coal-fired plants and displacing coal will not be politically easy.
He said now that the supply equation has changed, the pressure is on industry organizations to show the risks and benefits of taking an aggressive approach toward increasing gas consumption, noting that “some primary research” is required to support that case.
Eric Marsh, a Denver-based vice president of EnCana, said it is not unreasonable to assume that 20 percent of coal-fired plants in the U.S. could switch to gas in the next decade, noting that gas-fired plants produce 50 percent less greenhouse gas emissions than the coal-fired facilities.
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