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New gas supply basins urgently needed to meet North American demand Analysts point to Alaska, Mackenzie Delta among regions holding greatest potential to offset increasing decline rates now averaging 28% a year in mature basins Gary Park PNA Canadian Correspondent
Future natural gas growth demand, higher decline rates from wells in mature basins and a lack of infrastructure to deliver new supplies to market contain the ingredients of a heavy challenge for North America, say industry experts.
Against a “gloomy” backdrop, the leading question is where incremental supplies will come from to meet U.S. consumption that is expected to grow over the near-term by 900 million cubic feet per day, an almost four-fold increase from the five-year average, said Ron Denhardt, a principal with the natural gas service arm of DRI-WEFA.
Nola Ruzicki, with Mirant Canada Energy Marketing Ltd., estimated current North American production of about 71 billion cubic feet per day, of which 17 billion is Canadian, will need to expand by 16 billion cubic feet per day to meet demands in 2010.
Both were speaking to a mid-May GasFair Power 2002 conference in Toronto.
Ruzicki echoed Denhardt’s question: “Where will the required new gas come from? The frontier areas of Alaska, the Mackenzie Delta as well as the Maritimes, the U.S. Gulf and the U.S. Rockies make up the main production areas that will satisfy requirements by 2010,” she said. Challenges in Rockies, Arctic She estimated that about 30 percent of the resource potential of the Lower 48 is in the Rockies, but that region poses environmental concerns, complex geology and limited infrastructure.
In the Canadian Arctic the challenges include winter-only access to the best prospects and the need for sustained high commodity prices to cover the capital costs.
As a result “some of those projects may have a reduced sense of urgency,” Ruzicki said.
Her solution to an ideal supply and demand balance involves a blending of regulatory streamlining, robust production activity, cold winters, hot summer and cooperation among all stakeholders.
For now, however, Denhardt said the United States no longer has excess productive capacity, decline rates are rising and the primary producing basins are maturing.
He said average annual decline rates, which affect the measure of gas supply that the United States has to replace every year, have risen to 21 percent from 14 percent in 1990. “We have to replace approximately twice as much gas today as we did in 1990,” he noted.
Denhardt blamed the excess wellhead deliverability in the United States on “perverse regulatory decisions that we made, including ceiling on gas prices. When those ceilings were eliminated, the U.S. developed too much productive capacity and we’ve been drawing that down over the last 15 years,” he said.
The picture is no better in Alberta, Denhardt said, noting that first-year average, as opposed to annual, decline rates have risen to 40 percent from 24 percent over the last 10 years. Initial production rates down At the same time, initial production rates per well have slumped to 410 million cubic feet per day from an average 830 million cubic feet per day, again reflecting a maturing basin which requires more effort to get the same volume of gas out of the ground.
But the immediate prospects in Canada, which exports 17 billion cubic feet per day to the United States, offer little optimism.
Calgary-based investment dealer FirstEnergy Capital Corp. said gas well completions this year will fall by 23 percent from 2001 to 8,139, while Paul Beique, vice president of Dundee Securities Corp., warned the lack of exploratory drilling points to a repetition of the 2000-01 winter price spikes.
Regardless of prospects for a drilling rebound in 2003, the current drilling restraint points to a volatile gas market over the next three or four years as shrinking supplies result in price run-ups that knock out incremental demand, Beique said.
“Then the real problems start as we get down to a base level of natural gas demand,” he said. “On that basis, we can’t bring on Mackenzie Delta gas or the LNG projects fast enough.” Exploratory drilling down As the number of drilling prospects declines in the Western Canada Sedimentary Basin, exploratory drilling as a percentage of well completions has dropped to about 25 percent from about 50 percent a decade ago, Beique said.
He warned that the lack of exploratory drilling in Canada and in the United States, where it represents less than 5 percent of completions, will inevitably lead to a supply crunch that will send prices skyrocketing.
“We have just gone through a very huge gas phase, the past couple of years,” Beique said. “We are going to see a repeat of that, in spades, over the next two or three years. We had better get out there and drill a lot more gas wells.”
Estimating that U.S. gas production fell to 50.2 billion cubic feet per day in March from 54 billion in January 2001, he predicted that price fluctuations will eventually squeeze incremental demand out of the system and supply will not be able to meet basic needs.
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