CANADIAN FIRM FORESEES BALANCED GAS SUPPLY/DEMAND

Feb. 6, 1995
Balance on North American Gas Markets (21773 bytes) North American gas markets could balance within 2 years if current trends hold, heralding an era in which gas prices better reflect full cycle costs. But until most U.S. and Canadian gas provinces are producing at rates close to capacity, gas wellhead prices in the region likely will remain volatile at best. Prices will fluctuate between the marginal cost of producing incremental gas and the cost of substitute fuels.

Balance on North American Gas Markets (21773 bytes)

North American gas markets could balance within 2 years if current trends hold, heralding an era in which gas prices better reflect full cycle costs.

But until most U.S. and Canadian gas provinces are producing at rates close to capacity, gas wellhead prices in the region likely will remain volatile at best. Prices will fluctuate between the marginal cost of producing incremental gas and the cost of substitute fuels.

So says the international gas division of Natural Resources Canada (NRC), Ottawa, in an update of its July 1993 study of North American gas market dynamics.

"Continued market price volatility and uncertainty are likely for at least 2 more years," NRC said. "Thereafter, a better balance between reserves and production may evolve, which should lead to more stable prices with prices reflecting full cycle costs.'

NRC found North American gas production in 1992-93 was about 1.75% more than it had projected in 1993. As expected, gas production increased most in western Canada, the Rocky Mountains, and New Mexico, all regions where wells were producing far less than calculated maximums.

Meantime, North American operators in 1992 added about 18.15 tcf of gas reserves and in 1993 about 18.5 tcf, 7% and 5%, respectively, less than volumes NRC had forecast.

Gas reserve additions on the U.S. Gulf Coast in 1992-93 fell more than 3.3 tcf short of NRC's projected 19.6 tcf. Discoveries in 1992-93 in the Rockies added more than 2 tcf of reserves more than NRC had projected for the region, in the Atlantic region 565 bcf more, and in western Canada 452 bcf more.

FULL CYCLE COST

NRC considers the full cycle cost of gas to include spending at all stages of exploration, development, production, transportation, and distribution.

NRC contends that most gas being developed today lies in relatively mature areas where deliverability can be increased with development drilling. Spending is not needed in such areas for items like regional geophysical surveys, drilling rank wildcat wells, or installing grassroots regional transportation systems.

Competition on North American markets has forced gas prices so low that many operators are willing to sell gas at prices that do not reflect elemental logistical costs in frontier areas.

When demand for gas increases in North America to more closely match available supplies, NRC reasons, producers won't be able to maintain deliverability without more frontier producing area activities, such as conducting regional seismic surveys or installing regional transportation Systems.

That means the total cost of finding, developing, producing, and distributing gas will increase, more nearly reflecting full cycle costs and putting upward pressure on wellhead prices.

MARGINAL SUPPLIES

NRC concluded, as in its earlier report, that prices on North American gas markets continue to be bounded on the low side by the cost of producing reserves in underutilized supply regions and on the high side by costs of competing alternative fuels.

'At present," NRC said, "the marginal cost of incremental gas production is not a full cycle cost. There is no strong link between full cycle costs and gas prices."

NRC said the greatest immediate potential for increasing production lies in regions with the largest difference between maximum and minimum reserve:production ratios. In such areas-western Canada, the Rockies, and New Mexico, for example-production can be increased at lower costs by developing existing reserves. A higher rate of discoveries is not needed immediately to maintain production.

Although gas production in 1992-93 rose faster than projected in western Canada, the Rockies, and New Mexico-and reserve:production ratios accordingly have declined-NRC said reserves in the regions remain underproduced.

"Since the marginal cost of incremental gas production in these areas is relatively low, they should continue to dominate North American production increases," NRC said.

MARKET PRICING

North American producers still are able to meet growing demand for gas, even at prices that don't encourage reserve replacement, NRC said. But production increases while reserves continue to decline obviously can't be sustained.

"There seems to be little question that upstream activity must increase overall for forecast levels of North American gas demand to be satisfied," NRC said.

With reserve:production ratios declining in all major gas producing areas and reserve levels in many approaching levels thought to be the minimum needed to sustain production, NRC said North American gas markets appear to be approaching better supply/demand balance.

In its 1993 report, NRC estimated that U.S. and Canadian gas productive capacity after 1997 will not allow suppliers to meet forecast demand growth.

"The conclusion of the analysis was solely that current trends could not continue in perpetuity and that something would have to change," NRC said.

Based on its latest examination of gas industry trends, NRC said, "The number of wells drilled per year in Canada and the U.S. must increase."

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