Canadian coalbed methane (CBM) will experience sharp growth over the next five years, although it will likely play a relatively small part in meeting North America's exploding natural gas demand, says a Canadian oil and gas analyst.

North America will need up to 12 billion cu. ft. (bcf)/day of additional natural gas by the time Vancouver lights the Olympic torch, and the only way to meet that demand - given the steady decline in conventional gas production - is by growing output from unconventional sources such as CBM.

Andrew Potter, executive director and oil and gas analyst with CIBC World Markets, says that by 2010, Canada's CBM production will supply about 11 per cent of that gas demand.

"You can see that Canadian coalbed methane - as exciting a play that it is - is just one part of the overall supply component and they're all needed to meet the long-term demand forecast," Potter told delegates at a CBM conference held in Calgary last week.

CIBC forecasts that about 40 per cent of new gas demand will be met by liquid natural gas (LNG) imports from outside the continent.

Another 21 per cent is expected to be sourced in United States tight-gas production, about 13 per cent from gas shales and another 13 per cent from U.S. CBM output.

Potter sees the Horseshoe Canyon CBM play in east-central Alberta as the most exciting and the one with the most possibilities for growth in the coming years. He predicted that potential production from the field could hit 1.4 bcf/day by the end of the decade from about 200 million cu. ft./day today, although reaching this goal will require "a significant amount of capital investment and substantial drilling activity ... but we do believe that's an achievable number."

"The bottom line is (the Horseshoe Canyon) is a very attractive play from a growth profile, but what does this mean in terms of being able to solve North America's supply woes? Although it's one of the fastest-growing plays in North America, it's certainly not enough on its own to tilt the scales of gas supply-demand balance."

While it has a way to go to usurp conventional gas production, CBM and other unconventional gas sources bring with them juicy opportunities for explorers and producers and income trusts alike, Potter said.

EnCana Corp., Canada's largest gas producer, plans to drill 1,000 CBM wells this year alone, roughly one-third of the total holes forecast for 2005. The company has already begun divesting many of its conventional oil and gas properties in favour of unconventional plays, or what it terms "resource plays."

The company says that unlike most conventional exploration and development, resource plays are relatively predictable in timing, costs, output and reserve additions, and can provide steady long-term reserves and production growth.

"Right now (unconventional gas) is a sizable part of our operations and will continue to grow as we divest conventional plays and acquire (unconventional) ones," said EnCana spokesman Alan Boras.

Boras added that EnCana's goal is to have 75 per cent of its production from unconventional resources.

Potter said investing in unconventional gas is a smart move for attracting stock-market interest. He pointed to the examples of U.S.-based Ultra Petroleum and Quicksilver Resources, two stocks that trade between two and three times the values of their conventional gas-focused peers.

Part of the reason for this attraction is the generally lower production declines of unconventional gas compared to conventional resources, which make it a more appealing place to invest, something that shouldn't be lost on income trusts.

"This is particularly attractive for the trust market where there's very little capital available for reinvestment. That's the market that wants low-decline assets," Potter said.

And the markets will be there, he added.

Driving North America's natural gas demand is power generation, which CIBC predicts will grow by about 12 to 15 per cent by 2010.

Potter said gas-fired electrical generation is the only source that is actually growing in terms of market share. Coal, nuclear and hydro all require substantial lead time in terms of capital investment. He said that commitment of capital spending hasn't materialized.

"That means looking forward for the bulk of the growth has to come from natural gas-fired power generation," which could mean between six and 10 bcf/day in additional demand.

The other side of the gas-demand story, industrial demand - largely as a feedstock for chemicals - is less clear. High gas prices in recent years have knocked the wind out of the North American chemicals market, shifting demand to offshore suppliers. Depending what plays out in the coming years, demand for gas from this sector could rise or fall by about one bcf/day by 2010.

Meanwhile, concerns that rising LNG imports to the U.S. will displace the need for increased unconventional gas output are exaggerated, Potter said. While LNG - where natural gas is liquefied and later regasified, allowing it to be transported by methods other than pipelines - will play an important part in meeting increased North American demand in the coming years, cost constraints associated with its liquefaction, transportation and regasification will limit its role in the North American market.

"We will see increased LNG markets and LNG imports into the U.S. - there's no doubt about it. By the end of the decade we'll see about five bcf/day of new LNG imports coming into the U.S., but that does not preclude the need for unconventional gas development across North America," Potter said.

(John Ludwick can be reached at ludwick@businessedge.ca)