Western Canada basin has hit gas peak; coalbed methane offers hope

Region that produces 15% of U.S. gas supplies expects steady eight year decline

Gary Park

Petroleum News Calgary Correspondent

The Western Canada Sedimentary Basin, which meets about 15 percent of U.S. gas needs, has hit peak natural gas production, say recent studies by the National Energy Board and the Canadian Energy Research Institute.

Preliminary findings by the institute, which is assembling a state-of-the-industry report, estimate that the basin has 104 trillion cubic feet of gas yet to be found and developed by conventional methods at costs of less than C$4.50 per thousand cubic feet. That translates into 17 years of production at current rates.

At gas prices of C$2, the economic threshold drops to about 60 trillion cubic feet.

A spokesman for the institute has indicated that, based on known investment plans, the industry will struggle even to sustain current production levels from the Western Canada basin, which sprawls from the Northwest Territories into northeastern British Columbia across most of Alberta then into Saskatchewan and Manitoba.

That echoes the findings of the National Energy Board, supported by the Alberta Energy and Utilities Board in December that set the stage for steadily falling output over the next eight years.

The energy board projected deliverability will drop to 15.9 billion cubic feet per day by the end of 2004 from 16.6 billion cubic feet per day at the end of 2001 and said the Western Canada basin must achieve 3 billion cubic feet per day of new volumes just to maintain current levels.

“For the past several years, it has taken an increasing drilling effort” just to stay even, the federal regulator said.

Alberta in decline

The institute believes the slippage in Alberta will lower Canada’s overall output by 5 percent from 2001 to 16.4 billion cubic feet per day in 2004 and 2005 — only a slight variation from the energy board projection.

The prospect of coalbed methane contributing to incremental growth is still an unknown, although there is optimism that about 70 trillion cubic feet is recoverable, about 21 tcf of which can be extracted at prices of C$4 per thousand cubic feet.

A January assessment by Lehman Brothers analysts Thomas Driscoll and Philip Skolnick reinforced the increasingly bleak agency assessments.

Referring to energy board findings, the Lehman report said initial well productivity in the Western Canada basin is down almost 45 percent from 1995 levels, while average reserves per well are less than 25 percent of the 1995 average, largely because the industry has been targeting shallow plays.

Based on energy board statistics, the analysts said the fact that 67 percent of well connections in 2001 occurred in shallow gas areas of the Western Canada basin is “typical of a maturing basin and is a troubling signal.”

Rising costs likely

“Decreasing production rates and smaller reserves per well point towards deteriorating economics and higher F&D (finding and development) costs in Western Canada,” the authors said.

“As long as the industry continues to focus on mature, shallow natural gas plays we believe F&D costs will continue to rise as reserve finds are getting smaller. We believe this environment makes it challenging for companies to create shareholder value in the Western Canadian basin.”

From a ponderous start, coalbed methane, which accounts for 7 percent of U.S. gas production, is now coming into focus in Western Canada.

The energy board predicted in January that coalbed methane development could multiply tenfold to 3,000 wells by 2025 and reach output of 4 billion cubic feet per day.

In its desire to promote new economic growth, the British Columbia legislature gave first reading March 26 to its Coalbed Gas Act in a bid to end uncertainty over ownership of coalbed methane.

Steve Roberts, executive director of new ventures for British Columbia’s Ministry of Energy and Mines, conceded that the ownership issue has been the major impediment to developing the resource.

He said the government’s objective is to include coalbed methane in petroleum and natural gas rights rather than granting ownership to the coal rights-holders — a proposal that seems likely to encounter stern opposition from the coal industry.

But a solution is vital to the British Columbia government’s desire to establish a coalbed methane regime and develop at least 10 projects over the next decade.

In the meantime, British Columbia has offered incentives such as including water-handling costs in royalty deductions and a C$50,000 royalty credit for each well drilled before February 2004.

Alberta and Saskatchewan have a much simpler land titles history than British Columbia that allows claimants to share coalbed methane revenues until the matter of ownership is resolved.

Thirty pilot projects under way

They include EnCana Corp, Devon Canada Corp., Apache Corp., Nexen Inc., Talisman Energy Inc., ConocoPhillips Canada Ltd., Suncor Energy Inc., Burlington Resources Canada Energy Ltd. and Dominion Exploration Canada Ltd.

But, as fast as the coalbed methane operators move into place, environmentalists are marshalling their troops.

The Vancouver-based West Coast Environmental Law coalition has warned that coalbed methane wells destroy wilderness and wildlife and contaminate ranch and farmlands.

The law coalition is currently holding four public forums and has invited activists from Wyoming, Colorado and Montana to discuss the problems that have accompanied coalbed methane development in those states, including a ruling last year by a U.S. Department of the Interior panel that provided the basis for challenging thousands of coalbed methane leases throughout the Western United States.

However, Interior's Bureau of Land Management released environmental impact statements in January that it believes could open the Powder River Basin in Wyoming and Montana to more coalbed methane drilling with little adverse impact on the environment.