Natural gas is a premium fuel suited for many uses in the industrial, commercial, residential, transportation and electricity generation sectors. It is heralded as a very clean fuel compared to other non-renewable fossil fuels such as coal, and there has been a large build out of gas-fired electricity generation in North America in the past decade. The question is: How sustainable are supplies of natural gas from domestic sources in North America and what is the outlook for imported liquefied natural gas supplies from foreign sources?/
Recent evaluations of Canada's intrinsic gas resources have been published in 2006 by the National Energy Board (NEB) and the Canadian Gas Potential Committee (CGPC). Of Canada's discovered gas resources, 63 per cent have been consumed, 24 per cent are remaining proven reserves with a lifespan of 9.4 years at current consumption rates, and 13 per cent are discovered resources with a further 4.9 years at current consumption rates. It turns out that 77 per cent of Canada's remaining gas resources, with a lifespan of 45 years at current consumption rates, have not been discovered yet, but are suspected to be there through sophisticated computer modeling of discovery histories and pool size distributions.
If we look a little deeper, we can see that we are encountering the law of diminishing returns with respect to the amount of exploration effort and expense required to recover a given volume of gas. For example, in 2006 the CGPC determined that 70 per cent of the ultimately recoverable gas discovered in the Western Canadian Sedimentary Basin (WCSB) was contained in approximately 44,000 pools (of which 70 per cent has been consumed). The remaining 30 per cent of undiscovered gas is estimated to be contained in more than 400,000 pools, so that the drilling effort to discover and produce this gas will be far greater than that to discover the first 70 per cent. Most importantly in this consideration, the WCSB accounts for two-thirds of Canada's remaining undiscovered gas resources according to the CGPC.
This is abundantly clear if one looks at the past decade of drilling statistics. In 1996, approximately 4,000 successful gas wells were drilled in Canada and production was about 5.5 trillion cubic feet per year. Canada's gas production hit a peak/plateau in 2001 at a little over 6 Tcf/year when nearly 11,000 successful gas wells were drilled. Despite drilling nearly 16,000 successful gas wells in 2006, production is essentially at the peak levels achieved in 2001 and is falling. The much-vaunted sources of unconventional gas (coal bed methane, shale gas, tight gas) are so far serving only to stem the decline. The cost of drilling a foot in the WCSB has doubled since 1999, whereas the amount of gas added per foot drilled has declined by more than 50 per cent. This is the treadmill: we need higher sustained gas prices to make this economic.
The situation in the United States is not much different. In 1999, a little over 11,000 successful gas wells were drilled, whereas in 2006 more than 30,000 wells were drilled. This did not change the fact that U.S. gas production peaked in 2001 when 21,403 successful gas wells were drilled. So the U.S. is on the same treadmill that Canada is on–if not worse, as the overall annual decline rate in the U.S. now exceeds 32 per cent, which must be replaced by new additions through more drilling just to keep production flat.
On the demand side, the North American Electricity Reliability Council reports a large build out of new capacity since 1998, more than 90 per cent of which is gas-fired. There has been a large demand reduction in the U.S. in certain sectors for gas, with demand destruction in the industrial sector amounting to 22 per cent since 1997, but also significant reductions in the commercial, residential and transportation sectors. The only exception is the electricity sector, which has grown by more than 50 per cent over this period. U.S. natural gas consumption peaked recently in 2000, and has declined since due to demand destruction from volatile gas prices, greater efficiency and fuel switching. This, plus the fact that we have gotten lucky with the absence of hurricanes in the Gulf and a couple of warm winters in eastern North America has served to reduce gas prices to the point that many prospects in Canada are uneconomic to pursue, and this is reflected in the decline of rig activity in Western Canada over the past few months. The question here is can we keep getting lucky rolling the dice on warm winters, hurricanes, demand destruction, well productivity, etc.?
The Mackenzie Valley and Alaska pipelines are incorporated into the forecasts of the Energy Information Administration and National Energy Board, along with quite bullish domestic production growth forecasts, which seem somewhat optimistic given the current drilling and production statistics. Let's hope that these forecasts happen despite the recent cost inflation for the pipelines and the productivity declines for domestic exploration–Plan A. In the event that the pipelines are not completed in a timely manner and domestic productivity declines continue–Plan B–would force us to rethink our consumption of natural gas to move toward a more sustainable energy future.
Liquefied natural gas has also been heralded as the salvation for North America's natural gas woes, and will certainly be an incremental contribution to a solution. The developing issue, aside from the NIMBY opposition to new regasification plants, is a secure supply of liquefied natural gas. Anadarko shelved its Point Tupper LNG facility on Cape Breton Island due to an inability to secure a long term contracted liquefied natural gas supply. The Irving project in St. John, New Brunswick, which is partnered with the major liquefied natural gas producer Repsol, however, is going ahead. It is likely that liquefied natural gas going forward will only be a partial solution to domestic production declines, and it will further have geopolitical issues, given the geopolitics of the sources of supply.
Energy is a huge issue going forward of which natural gas is a part, and warrants our fullest consideration given its importance to all aspects of our society.
David Hughes is a geologist with the Geological Survey of Canada and is also team leader for unconventional gas for the Canadian Gas Potential Committee. He has studied energy issues for more than 35 years but speaks here on his own behalf, not that of Natural Resources Canada.
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