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Canadian gas producers face tough times
Canada’s share of North American natural gas production has fallen over the past five years from one-quarter to one-fifth and profit margins have plummeted from 10-13 percent in 2007 to 1.3-1.8 percent in 2009 and 2010, according to the Conference Board of Canada.
In a summer 2011 outlook report, the board said that bleak picture is likely to continue over the short term, while medium-term prospects are “only slightly more optimistic,” said board economist Todd Crawford.
He said the “threat that more shale gas will flood the market, coupled with only moderate demand growth” points to average prices of C$3.80 per thousand cubic feet for 2011 that will not climb back above C$6 until 2015.
The report forecasts that drilling activity will remain well below pre-recession levels, especially in Alberta, where output is expected to decline by 20 percent from 2010 levels to 8.1 billion cubic feet per day in 2015.
Strong increases from British Columbia’s shale gas deposits and new output, starting this year, from Nova Scotia’s offshore Deep Panuke project will help slow the decline in production, but not enough to offset the decrease in Alberta.
Not everyone agrees But not everyone agreed with the board’s assessment.
Mark Salkeld, president of the Petroleum Services Association of Canada, said drilling activity “is not weak — all appropriate and available equipment is working or booked to work and new bigger triple-type rigs are being manufactured to better handle the deeper horizontal wells and lateral sections.”
While there is no doubt that the industry has shifted to oil from natural gas, gas drilling remains strong because of the focus on liquids-rich deposits, he said.
Gary Leach, executive director of the Small Explorers and Producers Association of Canada, agreed the gas sector is in transition, but disputed the board’s finding that Canada’s overall production will “fall indefinitely.”
He said there are already indications that Western Canada’s volumes are stabilizing.
Global markets needed The board said that unless North American producers can access global markets where demand is strong, the gas price at Alberta’s AECO trading hub will rise to only C$4.20 in 2012 and C$6.14 in 2015, although that would boost revenues to C$54.6 billion from C$34.7 billion in 2011.
Industry spending should increase to C$48.5 billion in 2015 from about C$34 billion this year, while pre-tax profits will increase to C$6.1 billion from C$774 million over the same period, the report said.
The board estimated U.S. production of marketable gas, excluding Alaska and the Gulf of Mexico, will average 61.8 billion cubic feet per day this year, up 25 percent from its 2005 trough, but it expects production increases will slow over the next few years, with the Gulf continuing its decline from peak levels.
It said companies have been forced to drill at least one well for every 640 acres to retain long-term leases on their assets, thus artificially inflating the market-determined level, but it projects U.S. demand will accelerate to a moderate pace over the years to 2015 unless the U.S. slips back into recession or experiences a sustained period of lackluster growth.
—Gary Park
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