North America’s natural gas sector shows early signs of breaking free from the bonds of the past five years.
Kevin Heffernan, president of the Canadian Society for Unconventional Resources, told a conference in Calgary earlier in July that the Canadian upstream sector is on the “cusp of a renaissance.”
As Canadian LNG export proponents start seriously laying the groundwork for their projects, attention is turning to securing the necessary gas supplies to underpin final investment decisions.
Meanwhile, new forecasts point to 2.57 percent annual growth in North American natural gas-fired power generation, according to the consulting firm of Black & Veatch, while Calgary-based Ziff Energy Group is predicting annual growth of 1.3 percent.
Heffernan said the gas activity lull during prolonged weak gas prices has not all been bad, noting it has given the industry time to absorb and take advantage of a technological evolution and revolution.
During the slump some companies have been able to substantially rebuild their reserves and have got to grips with tackling resources that have become more difficult and costly to access, he said.
Proven reserves down sharply
Even so, the latest industry statistics from 146 of Canada’s leading producers point a troublesome trend, with proven reserves dropping sharply last year to 36.53 trillion cubic feet from 40.86 tcf.
An estimated 3.62 tcf of proved reserves were added through discoveries and extensions, compared with a record 6.11 tcf in 2011, reflecting a sharp decline in completions of gas-targeted wells to 1,253 from 2,768 in 2011.
The reporting companies also listed total Canadian production at 4.19 tcf, translating into an 86 percent replacement rate, the second lowest over the past decade. When revisions to reserves are factored in, the production replacement rate for 2012 slumped to 36 percent.
Black & Veatch is forecasting a significant rise in the share of gas-fired capacity over the next 25 years, with combined-cycle generation increasing from 21.6 percent of the United States mix to more than 54.8 percent by 2038.
Over the same period, coal’s contribution to power generation is expected to shrink to 21 percent from 43 percent.
Black & Veatch is calling for sharp growth in North American gas demand to 108 billion cubic feet per day in 2038 from 62 bcf per day this year, with demand for electricity generation expected to double over the next 20 years.
Black & Veatch analysts are also counting on Henry Hub spot prices rising to $6 per million British thermal units by 2020 from the current $4-$5.
Fuel switching a factor
Bill Gwozd, Ziff’s senior vice president for gas services, said gas accounts for 25 percent of North America’s current power generation, while many power plants are adopting a business model that allows them to “switch (fuels) on a dime’s notice” to the most effective fuel source.
He said gas consumption is likely to increase over coming years because of its cleaner-burning properties compared with coal.
In Canada, which accounts for about 13 percent of power generation in North America, only about 10 percent of generation is fueled by gas, but Gwozd expects that will rise.
In Canada, industry statistics show producers booked negative revisions for last year of 2.12 tcf, compared with positive revisions of 1.19 tcf in 2011, the highest negative level since 2002.
Companies also experienced a sharp setback from low commodity prices by trimming 1.36 tcf from their proved reserves due to economic factors.
Since the gas price decline started in 2008, Canadian producers have de-booked 4.13 tcf, with the cutback climbing rapidly from 201.5 bcf in 2008.
At the end of 2012, 11 companies claimed proved reserves of more than 1 tcf, led by Encana at 6.73 tcf (down 4.8 percent for the year), followed by Canadian Natural Resources at 3.99 tcf (down 6.59 percent), Apache Canada, which acquired most of BP’s Canadian assets in 2010, at 2.14 tcf (down 39.75 percent), Husky Energy 2.07 tcf (down 7.99 percent) and ConocoPhillips Canada 1.76 tcf (down 16.52 percent).
Only six producers added more than 100 bcf to their reserves count, led by Encana with 880 bcf, Peyto Exploration & Development 336.3 bcf, Tourmaline Oil 326.8 bcf, Apache 252.1 bcf, Birchcliff Energy 166.3 bcf and Husky 145.2 bcf.
The leading positive revisions were posted by ARC Resources at 22.42 bcf, Encana 217 bcf, Penn West Petroleum 138 bcf, Advantage Oil & Gas 136.1 bcf and Talisman Energy 96.8 bcf.
On the negative side, Apache recorded 1.44 tcf, EOG Resources Canada 94.5 bcf and Shell Canada 683 bcf.
The most successful drilling programs yielded 880 bcf for Encana, followed by Peyton at 336.3 bcf and Tourmaline at 326.8 bcf.
Proved reserves of coalbed methane entering 2013 were 1.58 tcf, with Encana owning 1.45 tcf after adding 125 bcf from drilling, with only 17 other companies reporting CBM reserves.
Six with shale gas reserves
Six companies — Encana, Nexen, Yoho Resources, Trilogy, Athabasca Oil and Lightstream Resources (formerly PetroBakken) — reported shale gas reserves, with Encana growing to 897 bcf from 673 bcf, while Nexen dropped to 189 bcf from 319 bcf after disposing of 122 bcf of reserves.
Heffernan told the Calgary conference there is “quite simply a staggering amount of gas that is technically recoverable” in Western Canada.
“The industry knows where these reservoirs are and the challenge is getting the gas out of the ground,” he said, noting the reverse from earlier years when finding reserves was the challenge and producing them was easy.
He said fracturing individual segments along horizontal wellbores is “the trigger for what I consider to be the revolution in the natural gas industry.”
Heffernan said multistage fracturing continues to evolve and has now achieved 20- to 60-stage operations compared to just three- or four-stage operations only a few years ago.
“That allows very, very precise stimulation of reservoirs and enables much better recovery of hydrocarbons from these very technically challenging reservoirs,” he said.
Heffernan noted that the biggest blow for Canadian producers is the loss of “historically key markets” in the United States, where the technological revolution has made its greatest impact.
