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Best of times, worst of times for Canadian natural gas With rising prices, falling supplies all over country, Alberta regulator shuts in gas wells in favor of bitumen; producers say action that of a “banana republic” Gary Park PNA Contributing Canadian Correspondent
Natural gas is on an apparent collision course in Western Canada as prices hover near benchmark highs while supply shortfalls set off alarm bells.
Spot prices at the wellhead have rallied more than 50 percent in the last year to reach about C$3.70 per thousand cubic feet and most analysts forecast averages will range from C$3.20 to C$3.50 over the next two years — the best outlook for producers since the mid-1980s.
But that optimism, accompanied by record gas drilling, has to contend with reverse trends showing a relentless decline in gas reserves, declining field receipts and some of the lowest storage levels on record just as some forecasters are betting on a 75 percent surge in U.S. domestic consumption over the next 20 years.
TransCanada PipeLines estimates field receipts in Alberta for the past winter alone averaged 12.4 billion cubic feet per day — almost 500 million cubic feet under expectations.
The pipeline also said storage levels in the province, despite a mild winter, have fallen to 116 billion cubic feet, or 49 percent of capacity — a level that will require an average summer injection rate of 580 million cubic feet per day to replenish, or almost double last year’s injection.
David Street, an analyst with investment bank Griffiths McBurney & Partners said four consecutive warm winters in North America have masked some realities that could lead to a supply crisis.
Gas reserves down to less than 11 years He said the Canadian gas reserve life index is now less than 11 years — it was a mandated 25 years until deregulation in the mid-1980s — and declining by more than 20 percent a year, while demand expands.
Despite a record 6,300 gas wells in 1999 and an anticipated 7,500 this year, ARC Financial Corp. said half the completions were in southern Alberta’s easily accessible shallow wells, where initial decline rates are greater than 30 percent and reserve sizes are shrinking.
ARC warned that Canadian production will struggle to meet demand, even with new contributions from the Sable field offshore Nova Scotia and the Fort Liard field in the lower Northwest Territories.
Wilf Gobert, director of research at Peters & Co. in Calgary, said the best hope is that oil and gas shares will climb out of their slump and cash flow from robust oil and gas prices will support more drilling in the deeper gas plays of the Canadian Rockies.
Regulator shuts in oil sands But one possible major setback, affecting trillions of cubic feet of potential reserves in northeastern Alberta, has just been delivered by Alberta’s energy regulator.
The Energy and Utilities Board issued a landmark ruling in April that will shut-in up to 185 billion cubic feet of reserves in a small pocket of northern Alberta’s oil sands leases and could extend across the sprawling region.
The Energy and Utilities Board verdict ended a four-year squabble between Gulf Canada and seven gas producers and opened the door on a much wider showdown between the oil sands and gas sectors, which now represent Alberta’s long-term energy hopes.
The regulator ordered the shut-in of 146 of 183 gas wells, which have been yielding 85 million cubic feet per day of associated gas in the Surmont area, where Gulf owns 15 billion barrels of bitumen reserves (35 percent to 50 percent recoverable) and plans a C$1.3 billion venture with TotalFinaElf to produce 100,000 barrels per day over 30 years, starting in 2006.
But 47 days of public hearings and 7,000 pages of transcript convinced the Energy and Utilities Board that Gulf was properly concerned that gas production would lower Surmont reservoir pressures and make bitumen extraction using steam-assisted gravity drainage uneconomic.
The board estimated that when converted on an energy equivalent basis, the gas reserves were less than 1 percent of the total bitumen in place and concluded the bitumen resources “represent a significant energy resource for the province and should be protected for future development.”
From the gas producers, who said they could lose C$925 million a year in revenues, there was immediate outrage as they accused the board of confiscating their assets. Robert Watson, owner of Giant Grossmont Petroleums, which has an interest in 54 of the wells, said the ruling made Alberta look like a “banana republic.”
Until they calculate their losses and decide whether to ask the board for a rehearing or to take their case to Alberta courts, the precedent-setting nature of the ruling is unclear.
But they are adamant compensation should be assured from a government that issued permits allowing the companies to invest about C$200 million on gas infrastructure.
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