NEB sees 'holding pattern' in Canadian gas deliverability

Deliverability of natural gas in Canada is in what the National Energy Board calls a “holding pattern” because low prices have suppressed gas drilling.

In a report covering 2013-15, NEB says current gas prices of about $3/MMbtu preclude cost recovery in the development of most gas prospects and make producers in Western Canada unable to attract equity investment. With dry-gas drilling minimal, growth in gas supply comes from production associated with oil and natural gas liquids.

NEB said it expects Canadian gas demand to grow by 500 MMcfd during 2013-15, mostly from oil sands development in Alberta, as deliverability continues to exceed demand.

Gas trends

NEB notes these trends:

• The recent decline in North American gas prices results from dramatic growth in US shale-gas deliverability, which has outpaced growth in North American gas demand.

• Record-hot summers might not continue, lowering the draw on gas-fired power generation and reducing gas demand.

• Companies continue to drill some gas wells to at least partly offset declines from existing wells.

• Some gas development in Western Canada is likely being postponed because Canadian LNG projects are taking longer than expected to obtain commitments from gas purchasers.

• Although preliminary industry testing of the extensive Duvernay shale in Alberta is under way, more testing and the creation of development strategies are needed. NEB’s deliverability forecasts include a range of estimates for Duvernay development.

• The large potential of the Liard basin, Horn River basin, Cordova embayment, and deeper portions of the Montney formation is almost all dry gas. Without NGL revenue, these resources depend on higher gas prices for development.

Deliverability forecasts

NEB bases its forecasts for the ability to produce gas from new and existing Canadian wells 2015 on three cases for gas prices at Henry Hub in Louisiana.

The low-price case assumes growth in markets for Canadian gas slowed by mild weather, modest economic growth, and continued displacement by gas from the US.

In this case, the price averages $3.65/MMbtu, and total Canadian deliverability falls to 11.4 bcfd in 2015 from 14 bcfd in 2012.

The moderate-price case assumes an average of $4.35/MMbtu and projects deliverability in 2015 of 12.5 bcfd. It’s based on moderate growth in North American gas demand, declining Canadian gas deliverability, and slowing US supply growth. The combination gradually reduces excess deliverability in North America.

The gas price averages $5.95/MMbtu under assumptions of normal winter weather, continued hot summers, stronger economic growth, and less displacement by US gas supplies. The high-price case also assumes power generators continue to favor gas over coal in some markets despite rising gas prices for environmental reasons or to better match variations in electricity demand.

Deliverability in the high-price case flattens at 13.1 bcfd in 2014 and 2015.

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