Canadian producers scrambling to boost gas deliverability

Aug. 30, 1999
Improving oil and natural gas prices are spurring Canadian gas producers to ramp up efforts to increase wellhead deliverability and fill new export pipeline capacity.

Improving oil and natural gas prices are spurring Canadian gas producers to ramp up efforts to increase wellhead deliverability and fill new export pipeline capacity.

But most industry executives expect a time lag of 2-4 years, depending on a number of variables, before deliverability fully catches up with capacity. And analysts caution that a continued strong exploration and development effort to boost Canadian deliverability hinges on adequate prices continuing to fuel healthy cash flow.

Pipeline expansions

There are at least three major pipeline system expansion projects to transport natural gas to U.S. markets and Eastern Canada that have recently come on stream or shortly will.

These include: an addition of 900 MMcfd to TransCanada PipeLines' system; a 700 MMcfd expansion of the Northern Border pipeline system; and the 1.3 bcfd of gas from Western Canada to the Midwest, when the Alliance Pipeline comes on stream in late 2000.

There is already evidence that companies are picking up the pace on the gas side with drilling in Western Canada now favoring gas over oil. And statistics on gas well completions show an uptick in activity to meet an expected surge in demand. Total gas completions in the basin hit a record high for the period of 2,000 for the first 4 months of 1999; the 6-month total was 2,809.

Recent gas prices of $3/Mcf (Canadian) in Alberta have been driving a significant amount of exploration and development while shifting the drilling ratio to 60% favoring gas, said Greg Stringham, vice-president of the Canadian Association of Petroleum Producers.

Pipeline expansion, says Stringham, has eliminated bottlenecks and has reconnected Western Canada gas prices to North American markets. Stringham also expects improved gas price levels to continue and support a strong E&D effort on the gas side. The biggest misconception that Stringham hears, he adds, is that Western Canada is short of gas. He says that is definitely not the case.

One concern that some producers do have, explains Stringham, is whether there will be enough development to fill all the pipelines, especially the recent addition by Northern Border. "The anticipation now is that that may not be the case, but the closer we can be to balance, the better. From a producer's perspective, it's better to have just a slight surplus of capacity that gives you the option to go wherever the market's best.

"People are turning as much cash flow as they can to gas," continues Stringham, "but it may take a year or so to get back to being close to full on existing capacity-about the time when Alliance comes on. Companies have invested in pipelines and are paying charges now. They don't want much empty capacity. There's an industry saying that it's better to pay a nickel to have a little extra capacity than to pay $1.50 if you don't have enough."

Dennis Cornelson, president and CEO of Alliance, says he is confident the new line will be full because of its firm contracts with shippers. It will take momentum for the industry to turn around, he adds, but he doesn't think it will take that long.

The major pipeline expansion of the Pacific Gas Transmission pipeline from Alberta to California in 1993, notes Stringham, took less than 1 year to fill and was then followed by years of constraint on capacity and weak prices for Western Canada.

Randy Cormier, director of Western Canada basin strategic analysis for TransCanada, says additional pipeline capacity totaling about 2.7 bcfd coming on line during 1998-2000 will produce a temporary capacity overhang from the basin. He says that, with estimated average annual supply growth of 500 MMcfd, it will take 4-5 years for supply to catch up with demand.

Cormier says numerous factors could affect the actual time lag, including the level of exploration, prices, nuclear power shutdowns in the U.S., and the possible impact of legislation to control greenhouse gas emissions.

Increasing deliverability

George Fink, chairman of the Small Explorers & Producers Association of Canada (Sepac), says producers are working hard to ensure there will be enough gas to fill the pipelines.

The key factors, says Fink, are whether current robust gas prices can be sustained and how much incremental cash flow companies can put into gas E&P. Some companies are still faced with shrinking lines of credit and bankers looking for some debt repayment after low oil prices squeezed cash flow and debt, he noted. Fink insists there will be some lag in filling pipelines and that the Alliance system will have some capacity to fill, but there are many variables that could affect timing.

John Jacobsen, past president of the Canadian Association of Oilwell Drilling Contractors (Caodc), says the industry is now gearing up to meet the deliverability challenge.

Jacobsen, also Precision Drilling's operations vice-president, says there could be a 2-year time lag before deliverability catches up with capacity. Gas prices, says Jacobsen, will definitely move up, and the price differential between Canadian and U.S. gas will continue to narrow.

Caodc remains cautious on its drilling outlook and has not yet revised a February forecast of 8,400 total wells in Canada this year, says Jacobsen. Some analysts, he notes, are now predicting 10,000 wells. And, he adds, operators are well aware of the improved economics for gas and that has helped fuel the 60:40 gas-to-oil drilling ratio, which reverses the previous ratio.

Jacobsen says also that recent drilling successes in the Foothills region of Alberta and the Fort Liard area of the Northwest Territories are spurring further activity in these areas.

A number of large producers have already expanded their natural gas operations in response to improved prices.

Jim Buckee, CEO of Talisman Energy Inc., says his company's $245 million budget for 1999 is 75% aimed at gas. Talisman, which produced 631 MMcfd in 1998, is increasing its activity in the Alberta foothills and other areas.

"To the extent that investments are not made, supply declines. It is going to take time to get production capacity back up again," said Buckee. "The stage is set for a period of strength in gas, but I believe that there might be short-term inventory wobbles even yet."

Other significant producers-such as Anderson Exploration Ltd., Poco Petroleums Ltd., Canadian Exploration Ltd., and Canadian 88 Energy Corp.-have ramped up their gas activity and spending.

Petro-Canada said its Western Canada E&D spending of $260 million this year will be focused almost entirely on natural gas. The company has scored a string of recent exploration successes in the deeper-horizon play of the foothills area.

Industry expectations

Paul Mortensen, director of natural gas supply for the Canadian Energy Research Institute (CERI), says the institute estimates that 5,500 gas well completions would be required in 1999 to fill available pipeline capacity.

"I think 5,500 wells is a possibility, but it will take a lot of work to get there this year," said Mortensen.

CERI estimates that, to fill all pipeline capacity, 5,500-5,600 successful gas well completions will be needed in 2000; 6,000 in 2001; and 5,000-5,500/year beyond 2001.

Actual 1999 well completions, says Mortensen, will depend on conditions for the rest of the year. And, he notes, companies are still being cautious on the oil side to see if prices hold up.

Prices in the export market will be dictated by competitive prices in the Gulf of Mexico, said Mortensen. He expects Canadian gas prices to remain strong at least over the next 2 years, and he says the Western Canada basin has plenty of gas left and is one of the lowest-cost basins in North America.

Jim Osterbann, vice-president of gas services for Ziff Energy Group, says there are already early signs of a rebound and significant drilling response for gas with record completions in the first 4 months of 1999. That includes a resurgence in shallow gas operations in southeastern Alberta and Saskatchewan, where completions are relatively easy.

Osterbann says the start-up of the Alliance pipeline will pose significant challenges for the Western Canada basin, and there are all sorts of pipeline dynamics that could affect markets.

He said it would be important for the E&D effort to try to keep Alberta gas prices near $3/Mcf and to maintain cash flow for producers.

Gary Davis, a spokesman for TransCanada Transmission, says the company estimates there will be about 12.5 bcfd of Canadian gas supply this summer, an increase of only 200 MMcfd over last year. The company has gas to meet its contracts, but supply is tighter than expected and could tighten further this winter, said Davis.

Steve Becker, senior vice-president of marketing arm TransCanada Gas Services, says it is likely the market will see more capacity than supply until 2003-04. Key variables will include cash flow available to producers and levels of demand in the U.S. power generation market, he said.

Becker envisions strong levels for pricing, market prospects, and drilling for Canadian gas over the next 4-5 years. Alberta prices above $3/Mcf will be needed next winter to support such a strong drilling effort, he said.

For the longer term, notes TransCanada's Cormier, the Western Canada basin is a prolific, reliable, and low-cost basin with more than 200 tcf of remaining conventional gas potential. He expects Canadian production will play an increasingly important role in North American gas supply and production, growing from 16.2 bcfd in 1998 to 21.8 bcfd in 2010. He forecasts basin exports to the U.S. will grow to 4.4 tcf by 2010 from the 1998 level of 3.1 tcf.