|
Oilweek Magazine
|
 |
Oilweek subscribers can click on the cover to access their full-version digital copy of the current edition of the magazine.
|
|
| |
| Subscribe Now! |
| |
 |
|
| |
Click here to view a free sample digital edition of Oilweek magazine. As a paid subscriber, all issues of the magazine, including back issues, are online for you to read, search, and reference. |
|
|
| |
|
|
 |
|
Featured Articles
|
|
|
Jan 2010
| Source: Oilweek Magazine
| | | Forecast 2010: It’s a gas
| | | Alberta most affected by gas gyrations
| | | by AJM Petroleum Consultants
|
| The challenge: Can a geologist and an economist work together to provide a better forecast of Alberta´s natural gas industry in 2010? The easy answer should have been "no," but then again, we all enjoy criticizing other people´s forecasts, so why not test a few theories and see if we can do any better?
Simply put, the challenge has three parts: how much gas will be produced in Alberta, how much will buyers pay for it, and how much of the revenue will go into Alberta government coffers?
How much gas will be produced in Alberta in 2010?
It is not commonly known that 80 to 90 per cent of Alberta has had declining natural gas production for a number of years. In the extreme case, northeastern Alberta has seen production drop to 35 per cent of its peak 10 years ago. Even the Alberta Deep Basin, where production grew by over one billion cubic feet (bcf) per day between 2003 and 2007, has struggled to maintain production levels in the last couple of years.
Unfortunately, even the most optimistic predictions of unconventional gas drilling and production cannot mask the terminal decline that is afflicting the Alberta gas industry as a whole.
AJM Petroleum Consultants geologists estimate that raw gas production in Alberta has already dropped from peak by nearly 3 bcf per day, but at 11 bcf per day of sales gas, Alberta is still currently in third place behind Russia and the United States in worldwide daily gas production.
Alberta will not run out of gas anytime soon. But the fact is we have squandered our easily produced, low-cost natural gas resources and have very little to show for it. Without the government ensuring that Alberta is the most attractive place in the world to explore and develop natural gas, the significance of Alberta´s gas industry to the Albertan and North American economy will wane quite rapidly.
So how much gas will Alberta produce in 2010? AJM believes we will exit 2010 with sales gas production of 10.5 bcf per day, a drop of 500 million cubic feet per day-enough to heat 1.35 million homes-from our production estimate for the end of 2009. To ensure the drop isn´t even larger, we would have to see an increase in the number of wells drilled, and the percentage of high-productivity horizontal wells would need to increase. Higher activity in 2010 will only occur with both higher gas prices and an attractive fiscal regime.
How much will buyers pay for natural gas in 2010?
There are really two questions at play here. First, how much will buyers pay for natural gas in 2010? Second, who will buy Canadian natural gas in 2010?
The industry and the current natural gas futures market are anticipating three factors that will at least move prices into the $5 to $6 range for 2009: reduced drilling in the United States may actually begin to impact U.S. production; increased industrial demand as the recession recedes; and a cold winter, especially in the northeastern United States.
The main competitor for natural gas is coal and at $4.50 per thousand cubic feet (mcf) the economics of coal versus natural gas are relatively equal. At $5, gas demand may lessen as buyers go back to coal, but now the environmental push to use natural gas as a clean-burning fuel weighs into the mix. A price of $5 per mcf might be conservative given the current influence of environmental factors, but with coal readily available, the likelihood of gas over $7 per mcf is a stretch. A price of $6 may be a reasonable average, at least if more normal storage patterns take hold through 2010. If not, 2010 gas prices will not be materially different than 2009 prices.
This leads us to the question of who will buy Canadian natural gas.
Natural gas is currently the energy generator of choice, and one might reason that as oilsands projects increase, then so will natural gas demand. Certainly this is a factor, but not a significant one. Any increased Canadian gas production will not likely find its way into the U.S. market, since any increase in U.S. demand will most certainly be met with new U.S. shale gas production. The Canadian market is therefore limited by required export availability into the United States and higher production costs.
What will be the impact on Alberta´s revenues?
Higher production costs in Alberta are not only a function of capital costs and our distance from the dominant markets, but also of the royalty structure that exists in Alberta. Any rise in price increases the royalty percentage. To keep our province competitive as a world player in natural gas, the Alberta government has to foster an investor-friendly environment that is at least as competitive as that found in the United States or our neighbouring provinces.
At the $6 per mcf price, there will not be significant new wells drilled, as the market will not need Canadian gas. The Alberta royalty revenues will see a price increase, but the continued base decline in production will neutralize any revenue gains.
From 2002 to 2008, natural gas and associated liquid royalty revenues yielded between $5 billion and $8 billion per year, but those days are gone. Future royalty revenues under the current environment will be fortunate to exceed the $3-billion mark per year. It will be even less if the investment environment reduces land sales and drilling as investors move their money into more lucrative markets outside of the province.
Alberta bonus and sales of Crown leases peaked in 2006 at $3.4 billion and declined to $1.2 billion in 2008. Despite strong November 18 sales, bonus bids are expected to be less than $400 million in 2009. Some may argue that the resources are still in the ground, so the value is still here. But it would take the industry a long time to recover and there are now alternative solutions like shale gas, and ultimately liquefied natural gas, feeding the U.S. market. The time to react is now or Alberta´s natural gas industry will die a slow death, with the focus shifting to oilsands as the only Alberta advantage.
How can Alberta regain control of its natural gas destiny?
Every producer has a choice where they look for their next production-whether it´s in Alberta, another province, the United States, or elsewhere in the world. At present, Alberta is pretty low on the list and industry is choosing to pursue opportunities elsewhere. The Alberta government must realize that, without radical changes, the natural gas industry can no longer be relied on as our cash cow.
We must reassess Alberta´s natural gas royalties to ensure they reflect the maturity of Alberta´s natural gas industry and the real costs and rewards of doing business here.
Let´s start with an ongoing incentive program for all natural gas and not one that has a 24-month expiry window. A permanent incentive will help with the capital risk and ensure better long-term planning. If the wells are not drilled, there is no loss in royalty revenue.
We must take the initiative to fund research into all types of natural gas opportunities-much of the growth in the British Columbia and Saskatchewan industries has been spurred by government agencies funding basic research and making data readily available. This type of activity should help reveal new opportunities in Alberta.
Finally, we must encourage risk-taking, experimentation, and entrepreneurial spirit in the natural gas industry by providing appropriate tax, royalty and other incentives. Areas that need addressing include the development of new, long-term markets to stabilize price, and ensuring more of the value chain stays in Canada rather than just exporting raw resources.
- Dave Russum and Ralph Glass, AJM Petroleum Consultants
|
|
|
