North American basins have huge remaining natural gas potential, but questions remain whether economics and the regulatory climate will allow deliverability to meet projected U.S. gas demand.
That was the message delivered by several speakers at a recent Canadian Energy Research Institute (CERI) gas outlook conference in Calgary. The same issue was the focus of a recent Ziff Energy seminar in Houston (see related story, this page).
Deliverability shortfallJoe Foster, chairman of the National Petroleum Council and CEO of Newfield Exploration Co., Houston, is confident the industry will rise to the challenge of meeting projected U.S. demand of 30 tcf/year in 2010 (Fig. 1 [70,298 bytes]).
But Foster said the industry clearly cannot do that without increasing both U.S. and Canadian deliverability. He said there is evidence that U.S. gas production has been flat since 1995 and that there's not much spare capacity in the system.
"I'm not sure there has been any real deliverability increases over the past 5 years. We have been able since 1994 to increase our annual production through more optimal use of storage," he said. "We have not necessarily increased our peak deliverability. The industry is operating at close to peak capacity year-round, despite two warm winters."
Foster cited these key underlying trends as setting the stage for a drop in peak North American gas production capacity:
- There has been a 15% decrease in U.S. gas rigs working in the past year. There has also been a decline of 46% in the U.S. workover rig count since January 1998.
- Capital spending plans announced earlier this year would not argue in favor of increased oil or gas activity in either the U.S. or Canada.
- The Gulf of Mexico, which supplies 25% of U.S. gas demand, has remained relatively flat in production during 1995-98, despite an increased rig count in that period. Gulf deepwater gas production has increased, but there has been a 25-30% drop in the number of rigs drilling for gas in the past year.
- The "fury of depletion" has affected production in both the Gulf of Mexico and in the Western Canada Sedimentary Basin (WCSB). There has been a serious inventory drawdown in Canada, with reserve life dropping by almost half in the past decade.
Foster said that NPC task forces are now updating a 1992 NPC market study. Objectives are to analyze the problems and provide the answers needed to increase deliverability and meet demand targets.
Market driversSteve Becker, senior vice-president, TransCanada Gas Services, said there is optimism in Western Canada, because gas prices are as high as they have been since 1985 and new pipeline capacity is expected to increase demand. But, he said, producers will face the challenge over the next 3-5 years of supplying enough gas to meet increased export and domestic pipeline capacity. That includes the current 900 MMcfd expansion by TransCanada PipeLines, 700 MMcfd growth by the Northern Border pipeline system, and new capacity when the Alliance pipeline from Western Canada to the U.S. Midwest comes on stream in late 2000.
Estimates of timing for deliverability to catch up with capacity from 2002-03 to 2005.
Becker said that challenges facing Canadian producers include how to increase gas production with cash flow restraints imposed by low crude oil prices and how to capture a share of the U.S. power generation market.
The TransCanada executive said there are three market forces currently driving natural gas activity: a rapidly maturing gas market, which is developing new market architecture such as new toll structures; a deregulating power market; and a depressed oil market, which is "the fly in the ointment."
Resource potentialPaul Mortensen, director, natural gas supply for CERI, said the WCSB at the end of 1997 had another 42 years of marketable gas potential, excluding coalbed methane, and offers potential gains from new technology advances. He said it has plenty of gas left and is one of the lowest-cost basins in North America.
Citing data based primarily on studies by the Geological Survey of Canada, Mortensen said that coalbed resources are potentially huge, but he doesn't expect much development before 2010 because of high costs and the expected ample availability of conventional gas.
He said the largest 50 gas pools in the WCSB dominate and account for almost 40% of gas production, and he contends that going to smaller pools will require greater effort and cost. The largest and most lucrative pools are located in western and southern Alberta, and they continue to account for two-thirds of the remaining discovered gas (Fig. 3 [118,801 bytes]).
Mortensen sees some price increases, in 1998 dollars, as new pipelines fill. He estimated a WCSB production rate of 7.3 tcf/year by 2010. About 6,000 gas well completions will be required in 1999-2000 to fill pipelines, with more gradual increases after 2002. He said there will have to be a 30% increase in drilling this year from 1998 levels to achieve 6,000 gas well completions, and the question remains whether there will be enough capital available to do this.
Roland George, of Purvin & Gertz Inc., said remaining reserves of economically recoverable gas in the U.S. are more than 1,000 tcf, regardless of which scenario is considered. He noted that North American gas production has gone up continuously for the past 30 years, adding that the real issue is not reserves but the economics of developing them.
U.S. production is projected to increase 4.5 tcf/year to 23 tcf by 2010 and to 26.4 tcf by 2020, George estimated. He said that most increased U.S. gas production will be in Louisiana and Texas, with a significant contribution from the deepwater Gulf of Mexico. He estimated that Mexican production will increase by 1.6 tcf/year by 2010.
In Canada, he said, production will reach 8.8 tcf by 2010, and Canadian gas will continue to be a major supply source for the U.S. Exports of 4.7 tcf by 2010 and 5 tcf by 2020 "will push the limit" of Canadian export capacity (Fig. 2 [82,464 bytes]). He also forecast production of 460 bcf/ year by 2010 from Sable Island off Nova Scotia and increasing flows of gas from there to the Midwest and U.S. Northeast.
R.A. McIntosh, vice-president, exploration and international, for Petro-Canada, said the WCSB is a mature basin but does have significant undiscovered potential.
He said it has more proven marketable reserves than any other basin in North America. Proven reserves of 76 tcf in Western Canada, for example, compare with 29 tcf in the U.S. Gulf of Mexico. At current production rates, the basin has 33 years of remaining and undiscovered reserve potential, with undiscovered potential reserves totaling 122 tcf and remaining discovered reserves totaling 62 tcf. Cumulative production totals 79 tcf.
McIntosh said the remaining big undiscovered pools in the basin will be in the Foothills and deep Devonian plays, and Petro-Canada has developed niche areas for exploration in the Foothills and some areas of northeastern British Columbia. These areas have higher potential but also have higher costs and are technologically complex. They now contribute 510 MMcfd of Petro-Canada's 760 MMcfd Western Canada gas production.
An example, McIntosh said, is the Wildcat/Benjamin Foothills play, where the company's track record in the past 3 years includes 18 new successful gas wells, an additional 500 bcf in reserves, a near tripling of production, and a processing plant operating at full capacity.
Price outlookCatherine Good Abbott, president and CEO of Columbia Gas Transmission Corp., questioned whether low oil prices will have much effect on exploration and development of gas in the U.S. Within a reasonable price range of $14-25 (U.S.)/bbl to 2010, she said, there is not a large effect on gas production.
She said a number of factors will add impetus to E&D activity, particularly in the U.S. Gulf of Mexico:
- Two-thirds of gas produced in the U.S. is non-associated, and, if oil prices are low, gas becomes more attractive to companies.
- In the deepwater gulf, rigs are expensive to build, and there is momentum for a financial commitment to drilling.
- Over the next 4 years, about 1,700 shallow and 800 deepwater leases expire, and companies will lose all their lease investments if they don't develop properties.
- The majors are "elephant" hunting in the gulf, and part of the impetus behind mergers has been so that these firms can leverage their technology.
- There have been tremendous improvements in technology on the exploration and production side.
Gas-fired powerIn addition, Abbott said, there has also been an improvement of 56% in the efficiency of gas-fired generation plants since 1980.
She said that a reason for optimism for gas demand in the U.S. Northeast market is the number of merchant power plants being developed. If only 20% of the power plant projects planned are completed, there will be a 1 bcfd increase in demand and $8.7 billion in added investment. She said "a lot of real money" has already been spent to reposition the power industry.
Abbott said that such developments will create a much more effective and competitive market for natural gas and a more efficient end use for the commodity. She also noted that Canadian producers have captured a huge share of the increased incremental market in the U.S. Northeast and face a challenge now to win a share of future growth.
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