National Energy Board: Western Canadian gas development marginal

New natural gas development in Western Canada was on the economic borderline last year as rising costs accompanied lower average production per well, according to a study by the National Energy Board.

Canada’s energy regulator said the risked average supply cost of C$7.88 ($8.42) per gigajoule was up 28 percent from the average Alberta spot price.

The supply cost — the minimum price needed to produce gas, including all costs, royalties and taxes, plus a 15 percent rate of return — ranged from C$4.86 to C$22.84, the study said.

The board estimated the Alberta daily spot NOVA Inventory Transfer price averaged C$6.11/GJ in 2007 and C$6.17/GJ in 2006, sharply off from 2005’s C$8.27/GJ.

Gas prices rebounded in the first half of 2008, reaching C$10-C$11/GJ in June before sliding back to the C$6-$7/GJ range.

Pursuing better returns, companies have pulled out of the shallow plays of southeastern Alberta to the Deep Basin, which was rated marginally economic at an average price of C$6.11/GJ yielding an after-tax rate of return of 15 percent.

Well costs were steep in the Deep Basin because of the need to drill deeper and overcome geographical challenges, but the high per-well production rates contributed to some of the lowest supply costs, in contrast with some of the shallower regions of Alberta and Saskatchewan, where low-cost wells produce at lower rates and are extremely sensitive to capital and operating cost escalation, the board said.

The study said the highest-cost supply area last year was northwest Alberta, with a risked cost of C$13.67/GJ, followed by the British Columbia Foothills at C$11.18/GJ, where the geology is complex and rolling terrain poses obstacles to infrastructure development.

The tight gas Mannville and Jurassic resource groups in the Alberta Deep Basin were the top producers in 2007, yielding 117 billion cubic feet at a risked supply cost of C$6.50/GJ and a payout of 4.91 years.

The board noted that the competitiveness of Western Canada alongside other gas regions of North America can influence investment decisions and determine how much gas is available within the region.

—Gary Park