Canada's natural gas reserves are on the rise and the potential marketability of coalbed methane (CBM) is strong, but a future gas-supply shortage still looms, energy industry analysts say.
A recent Ziff Energy Group report shows producers discovered more gas than they drilled in 2004, but high drilling activity indicates the spike will be a blip rather than an upward trend.
Meanwhile, a new Canadian Gas Potential Committee report estimates the Western Canadian Sedimentary Basin (WCSB), where most drilling activity is conducted, contains 528 trillion cubic feet (tcf) of commercially recoverable CBM.
"This (2005) year is one of the highest ever recorded from past decades, at (a reserve replacement value of) 122 per cent," said Bill Gwozd, Ziff's vice-president of gas services.
The reserve replacement value compares the amount of gas discovered to the amount produced in a given year. If discoveries exceed the amount pulled out of the ground, the percentage is expressed as above 100 per cent. If production exceeds reserves, the figure falls below 100 per cent, the break-even point.
New reserves are not greatly outpacing production, and demand for natural gas is increasing each year, especially in the Alberta oilsands where producers use gas to power their facilities. "There is a supply shortage looming," said Gwozd.
Calgary-based Ziff provides ongoing gas-supply forecasts and other analysis and consulting services to the global energy industry. The findings are based on known reserves (which are untapped discoveries) and the number of wells drilled, according to producers' annual reports.
Gwozd said the results demonstrate producers have drilled new wells in previously drilled areas where they are "quite certain" reserves will be. The increase also corresponds to an increase in wells, high gas prices, and the success of 3D and 4D seismic data as producers search for a lot of small plays rather than a few large plays in the WCSB, where deposits are declining.
Of the 122-per-cent reserve replacement value, 115 per cent resulted from drilling and extensions while seven per cent came from so-called "paper adjustments" - based on previously explored areas that contain more gas than originally believed.
"The successful wells, just by the sheer magnitude of the wells drilled, will have more success," said Gwozd.
In 2005, Canada's 30 top producers accounted for most of the 16,500 wells drilled, with 80 per cent in Alberta, 10 per cent in B.C. and most of the rest in Saskatchewan.
"(The high well count) bodes very well for the Alberta, B.C. and Saskatchewan governments," said Gwozd, referring to potential royalty and income-tax revenues. "The higher replacement levels help support high production levels."
In 2002, the reserve replacement value was only 36 per cent.
Calgary-based EnCana Corp. boosted its reserves more than 1.7 trillion cu. ft. (tcf). Canadian Natural Resources Ltd. increased its reserves by approximately 750 million cu. ft. However, both ExxonMobil Canada Inc. and Imperial Oil Ltd. drilled more gas than they discovered as their reserves corresponded to only 30-40 per cent of wells drilled.
ExxonMobil Canada produced 300 billion cu. ft. (bcf) while adding only 100 bcf worth of reserves, while Imperial Oil produced 225 to 230 bcf and added just 70 bcf in reserves.
"(Exxon Mobil Canada and Imperial) are in what we call harvest mode," said Gwozd, adding the firms want to reap the rewards of past years in which they built up reserves.
However, sizable portions of Canada's total reserves are proven but undeveloped, which means gas pools have been discovered and quantities have been confirmed, but the reserves have not been tied into pipelines and other infrastructure.
As producers increased reserves, they also boosted Canada's gas reserve-life index, which refers to how long existing supply will last. The index rose to 8.1 years in 2005 from 7.8 years in 2004. By comparison, the U.S. gas reserve-life index is 12.1 years.
But the average reserve life will shorten in the future, as producers drill more wells that produce lower returns, said Gwozd.
EOG Resources Canada Inc., Apache Canada Ltd. and Anadarko Canada Corp. have reserve lives greater than 15 years, while EnCana (8.4 years) and Devon Canada Corp. (eight years) are on par with the industry average. But, in keeping with their harvesting modes, ExxonMobil Canada and Imperial Oil have reserve lives of less than five years.
Based on the current proven reserves and reserve life indexes, Gwozd estimates Western Canadian gas production will decline three bcf per day by 2014.
He said total WCSB supply has depleted 45 per cent and will decline 60 per cent by 2014 as the region's reserves deplete by one per cent annually.
However, the Canadian Gas Potential Committee (CGPC) concludes in a recent report that the WCSB will continue to be the main gas-supply area in Canada for many years, and any new supplies will require high levels of exploration, development and other capital expenditures before they can be brought onstream.
The report, titled Natural Gas Potential in Canada - 2005, primarily covers a four-year period to yearend 2002-03.
The CGPC, a Calgary-based non-profit group comprised of industry and government geoscientists, says the estimated total original gas in place climbed 10 per cent to 652 tcf from 592 tcf in 2001, when its last report was released. But only 367 tcf is marketable, and supply has essentially stayed flat. Marketability depends on a producer's ability to access terrain, extract the gas economically, and ship it to markets via pipelines, roads and other means.
The estimated CBM in place actually dropped seven per cent to 528 tcf from 568 tcf in 2001, but no plays were considered marketable at that time. Some companies, including EnCana, Canadian Spirit Resources Inc. and MGV Energy Inc., have since produced commercial quantities.
The CGPC says 11 tcf to 45 tcf of CBM is marketable.
Meanwhile, in B.C., Surrey-based Terasen Gas Inc. is calling on the Liberal government to emphasize gas over electricity in the province's forthcoming revised energy plan.
Randy Jespersen, Terasen's president, wants more homes to be heated with gas to offset the high cost of building hydroelectric facilities.
The government requires provincially owned utility BC Hydro, which serves 1.6 million customers and derives most of its power from hydroelectric dams built in the 1960s, to sell electricity at the lowest rate in North America.
But Jespersen said that policy means power is sold at a price below the actual production cost, while Terasen, which serves 95 per cent of B.C.'s gas consumers, must vary prices according to different transmission fees in different regions of the province.
By law, Terasen must sell its gas at cost.
He said BC Hydro prices should vary according to transmission distances, or natural-gas suppliers should receive incentives to develop the same one-size-fits-all pricing model. Terasen has applied to the BC Utilities Commission for permission to introduce market-priced billing to its residential customers by 2007, as it has already done with commercial customers.
"I am not advocating that electricity must or should move to market-based rates," he said during a recent speech to the Vancouver Board of Trade.
Instead, he is calling on Victoria to ensure low electricity prices do not mask the cost of hydroelectric facilities.
Jespersen is also calling for electricity to be used mostly for lighting and to power computers, and he wants homes that require more than 100 amps of electricity to face an installation surcharge.
"That is done in other jurisdictions and that surcharge would serve as a deterrent, if you wish, for inefficient choice of energy forms, but still leave the choice with the consumer," said Jespersen.
Another option is for BC Hydro to provide gas suppliers and real estate developers with incentives to install and deploy gas-heating systems.
Ziff Energy's Gwozd called Jespersen a "champion" of residential consumers' interests, but said the Terasen boss "is probably dreaming" if he thinks the B.C. government will provide incentives for more gas consumption.
(Monte Stewart can be reached at monte@businessedge.ca)
