IS THE NATURAL GAS INDUSTRY IN CANADA REBOUNDING?
Have the Provincial Stimulus Packages for the Energy Industry
Introduced in Western Canada in Early 2009 Been Effective?
By Neil Purslow
The provincial governments of
Alberta and British Columbia (B.C.),
Canada separately announced incentive programs in 2009 to stimulate the
energy sectors within their jurisdictions. (See COMPRESSORTechTwo
January-February 2009 and April 2009.)
Throughout most of 2009, land sales
were sporadic and for the most part
lower than those experienced in previous years, and in November The
Petroleum Services Association of
Canada (PSAC) was forced to revise its
Canadian drilling forecast downward
to 8000 wells for 2009 — the lowest in
many years. With the arrival of the
winter heating season, natural gas
prices have recovered from a low of
about US$2.50 to the $5 to $6 range.
On first blush, it would appear that
these stimulus programs have had little effect, but is that an accurate
perception?
The complicated answer involves a
number of market and production factors. The natural gas market in North
America is different from most natural
resource commodities. Except for a
small quantity of LNG imports, more
than 90% of the natural gas consumed
in North America is supplied from
within the continent.
The recent economic recession resulted in a significant decline in natural
gas consumption in North America,
caused in part by the closing of industrial plants and companies switching to
alternative fuel sources to save energy
costs. With producers having few options for shipping gas off continent,
the result has been an abundance of
natural gas in the market at a price
lower than expected.
Economic recovery from the recession and/or the reduction of the natural gas supply stream are required
beyond the normal demand spikes for
heating in winter and air conditioning
in summer, in order to balance supply
with demand and raise the price of
natural gas to an acceptable level.
Experts agree that economic recovery
will eventually occur, but no one’s
sure when. And will the supply and
demand structure be the same as the
pre-recession period, especially given
the latest advancements in shale gas?
Fortunately, for the natural gas market, production rates for gas wells decline naturally at a relatively quick rate,
which helps balance oversupply with
demand. As much as 50% of North
American gas production comes from
wells drilled during the past five years.
New gas wells decline faster than oil
wells, with gas wells losing 30% or
more of their production capacity after
the first year and more than 50% after
two years. Total industry production
capability declines by an average of
20% per year from existing wells.
Many producers are reluctant to
curtail gas production as they attempt
to preserve their company’s cash
flow. However, the natural decline of
gas production occurs automatically
in the absence of a sufficient supply
of new gas wells. A reduction in land
sales and the lessening of drilling rig
activity is a good indicator of how the
future gas supply picture will look.
Compounding these indicators that
affect future Canadian gas production
are exports to the United States, where
historically at least 60% of Canadian gas
has been delivered. Canadian exports in
2009 fell because of soft demand, rising
U.S. domestic production, at-capacity
storage facilities and mild weather
dampening demand for power generation for heating and cooling. One other
factor that affects the price of natural
gas in Canada is the rise of the
Canadian dollar, which is a key determinant in establishing wellhead prices.
