Production rates for gas wells decline naturally at a relatively quick rate. As much as 50% of North American gas production comes from wells drilled within the last five years.
What does all this mean for Western
Canada, where the majority of the
country’s natural gas is produced?
Production is expected to drop in
2009 by an average of 1 Bscfd ( 28 x
106 m3/d) to an average of 14. 7 Bscfd
(416 x 106 m3/d). This would be the
lowest average production rate since
1995 and the largest single-year decline for natural gas production on
record in Canada.
Although the overall picture is not
encouraging for the industry, qualified
producers who drilled wells in 2009
have enjoyed reduced royalty rates
and increased favorable economics
through the various stimulus plans.
The Alberta government announced
that the two incentive programs introduced in March 2009 would be extended for an additional full year
(March 2011). It is anticipated that the
extensions will put a further Ca$1.5
billion into the producers’ treasury.
The program extensions were announced early enough for producers
to factor the incentives into their winter drilling programs. The timing appears to have worked. Land sales in
December (Ca$384 million) set a near
record that more than doubled the
total sales to date in 2009.
Alberta also announced that the
province will undertake a competi-
tiveness review of the oil and gas
industry. Since the province an-
nounced its New Royalty Framework
in October 2007, the world economy
has changed — dramatically. Alberta
became engulfed in the global reces-
sion, the price of oil and gas plum-
meted and new technologies re-
leased natural gas from shale
formations that led to an unexpected
increase in production and reserves
in both the U.S. and B.C.
drilled between 6233 and 7546 ft.
(1900 and 2300 m) into the deep
royalty credit program; and
• an additional Ca$50 million to the
Infrastructure Royalty Credit Pro-
gram to stimulate investment in
roads and pipelines.
Regulatory initiatives included
amending the drilling license regulations to create flexibility that allows
producers to move wells to production, while not losing privileges to
convert drilling licenses to leases.
The B.C. program is designed to
produce immediate economic benefits and stimulate drilling in the natural gas sector. The province is hoping to gain an incremental 942 wells
over four years and boost the economic viability of its unconventional
gas plays, including Montney and
Horn River shale. The program is expected to make B.C. one of the most
competitive oil and gas jurisdictions
in North America. Given that the land
sales in the province were the third
highest in its history (Ca$893 million), it appears the B.C. government
has achieved industry endorsement
for its plans.
PSAC estimated in November that
drilling in Canada would be the same
in 2010 as 2009 (8000 wells). Alberta
will experience a 5% drop, while B.C.
and Saskatchewan will enjoy a 7 and
10% increase, respectively. In the absence of a sufficient quantity of new
conventional wells being drilled, the
supply of gas will decrease, although
partially replaced through shale gas
initiatives, but the decrease will eventually result in increased prices. The
timing, of course, is uncertain.
The governments’ royalty and stimulus plans encourage producers to
drill wells, and many have with positive results. But to ensure long-term
sustainable growth in the industry, the
factors that affect supply and demand
must also improve.
One thing is clear — natural gas
supply is price elastic and many factors affect its price in North America.
Higher gas prices are needed over an
extended period of time to create a
sustained increase in rig activity for
new wells to be drilled. With demand remaining depressed and production increases in shale gas, it
looks like gas prices will remain low
and continue to experience uncertainty for quite some time. But with
December’s significant land sales,
many industry experts are now predicting that the number of wells
drilled in Canada will be higher (up
to 50%) than the current estimate of
8000 — a nice lift for gas producers
heading into 2010. ;
