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North American Gas Supply

Dawning of a New Era:
The Outlook for Western Canadian Gas Supply and Exports

Plus Analysis of Frontier Pipelines (Mackenzie Delta and Alaska)
Launch entire prospectus in PDF

OVERVIEW
Skyrocketing prices for British Columbia leases and corresponding weakness involving Alberta leases helped convince the Alberta government that their plan to take significantly higher royalties from the more prolific and costlier wells was a bad idea. Instead, encouraging investment in higher-cost/higher-yield gas resources made more sense (as in British Columbia). Yet, Alberta’s subsequent royalty
Key Study Dates
Workshop: May 7-8, 2008. Recording is available online.
Database Release: July 2008
WebEx Conference Call: August 26, 2008
Final Report Release: August 2008
changes that restored incentives for higher cost gas-oriented plays were not the principal driver behind PIRA’s latest assessment of WCSB gas supply.

Following a 2005-06 boom of historic proportions, WCSB drilling activity fell precipitously, in part simply reflecting an unsustainable frantic pace triggered by an extraordinary revenue boom. That drilling boom — along with the sudden emergence of coalbed methane (CBM) — masked a structural problem: lower non-associated gas well productivity related to maturing conventional resources. Subsequently, lower gas prices, higher costs in part tied to competition with oil sands for labor and equipment, a stronger Canadian dollar, and the October ’07 announcement of Alberta’s new royalty framework, all contributed to downward pressure on WCSB gas supply alongside a slowdown of CBM expansion.

On the demand side, growth will accelerate in part because of the gas required for the expansion of Alberta’s crude oil production from oil sands and bitumen. Between 2006 and 2015, PIRA’s Reference Case foresees the call on gas from heavy oil recovery more than doubling from a base of ~1 BCF/D. Gas burn for electricity generation will also experience substantial growth partly owing to the anticipated closure of Ontario coal plants. Between expected falling WCSB production and rising domestic demand, Canadian gas exports to the U.S. appeared caught in a vise that portended a slippery slope.

Instead, we now foresee the WCSB’s expansion of gas production from shale and tight sands resources being a gas supply “game changer,” as PIRA also anticipates in the case of the Lower 48. More specifically, we foresee the potential for explosive growth of gas production from resources that reflect expanding E&P investments, especially in British Columbia’s Horn River Basin and adjacent areas. It indeed appears to be the dawning of a new era.

Key WCSB shale and tight gas players are also extremely active in similar Lower 48 E&P activity. Indeed, the knowledge gained from Barnett Shale and other related Lower 48 gas supply plays is pivotal to the potential fast-track expansion of WCSB unconventional gas. Also, PIRA’s Reference Case reflects gas prices that should support the expansion of WCSB unconventional gas as quickly as possible.
At the same time, PIRA foresees a major risk that gas prices would fall significantly below our Reference Case levels at some point within the 2009-2011 period. By the middle of the next decade, such a scenario would have a heightened negative impact on WCSB gas supply relative to Lower 48 gas supply, especially given the immaturity of the WCSB’s shale gas play. Consequently, the sensitivity of WCSB gas supply to a near-term negative gas price cycle should expose Canadian gas exports to the U.S. to sizeable downside risks throughout the first half of the next decade.

Understanding these dynamic fundamentals will be a key to success for North American gas market participants. To help them, PIRA, in collaboration with Lippman Consulting (LCI), addresses these issues in “Dawning of a New Era: The Outlook for Western Canadian Gas Supply and Exports,” the third of four installments of The Changing Face of North American Gas Supply series. In addition to year-by-year analysis through 2015, the study analyzes the outlook for WCSB gas production through 2020 and the potential interactions between Canadian exports and the region’s infrastructure, gas marketing and basis pricing.
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Background
Canadian natural gas production has major implications beyond its own borders. Exports to the U.S. are heavily impacted by domestic production, and in turn Canadian gas balances are highly sensitive to price swings in U.S. markets. Record-high 2004-05 prices — partially fueled by Gulf of Mexico storms — triggered an historic expansion in western Canadian gas-oriented drilling. Of late, the key to WCSB supply has been rising production in Alberta’s Foothills and Foothills Front regions; the development of coalbed methane (CBM), mostly from Horseshoe Canyon; and declining gas production elsewhere even when the 2005-06 drilling boom was at its peak. The deeper wells in the Foothills Front are expensive to drill and develop, but they also have much greater productivity, making them the backbone of Alberta gas output in recent years.

Now, the key to future WCSB gas supply hinges on gas produced from shale and tight sands resources with the spotlight already focused on British Columbia’s Horn River Basin and adjacent areas. Although CBM growth has slowed for now, this resource will also be important to future WCSB gas deliverability depending on the timing and success of a transition from Horseshoe Canyon to Mannville CBM.
A New Gas Production Forecast
 The study analyzes and forecasts gas production for numerous individual basins and sub-

The 13 WCSB Study Regions

Alberta

Foothills

Foothills Front

Southeast

East Central

Central

Northeast

Northwest

British Columbia

Fort St. John

Fort Nelson

Foothills

Saskatchewan

Central

Southwest

Southeast
  regions by year through 2015, plus 2020. The study’s bottom-up type-curve “wedges” identify each year’s gas production by its vintage (year of first delivery) and provide the basis for an effective understanding of prospects for the wide range of the WCSB’s gas plays.

Using Lippman Consulting proprietary models for an historical perspective, the study examines gas output year-by-year and field-by-field by age of wells for numerous sub-divisions of the WCSB, including gas fields of special interest.  By doing so, future gas production scenarios incorporate explicit type-curve histories and forecasts that take into account the dissimilar well characteristics and prospects of sub-divisions and key fields within those sub-divisions. Economic assessments are centered around net present value, rates of return, and well costs based on “estimated ultimate recovery” for key WSCB sub-regions, giving market participants concerned with the future prospects of the WCSB the type of comprehensive analysis they require.

PIRA’s analysis of WCSB gas production prospects breaks out the 13 sub-regions designated by the National Energy Board in its annual forecasts of WCSB production (illustrated on the accompanying map). Type-curve wedges provide the production history of these sub-divisions, identifying the number of new gas wells, their decline rates by first year of production, their productivities, and market shares. Associated gas and CBM are handled separately for each province.
Given the fast-moving current situation, PIRA has also employed actual and projected rig counts in relation to first-year gas deliverability to forecast production. These “vintage” models of Alberta’s sub-regions calculate and project future efficiency in terms of new gas deliverability per active rig. Rig counts with five years of most recent history represent 12-month moving averages time-lagged against a particular month to formulate projections through December 2009.
Conformist thinking behind the longer-term outlook for WCSB gas production fails to capture the dynamics of an explosive source at its infancy: gas from shale. Lessons learned from Barnett Shale quickly adapted at Fayetteville Shale, Woodford Shale, and elsewhere in the Lower 48 underscore the transferability and adaptability of a rapidly growing understanding of shale gas extraction.

A British Columbia government poster placed shale gas reserves in the northeastern area of the province at 250 TCF, with a recoverability factor of just 2% as recently as November 2005. By comparison, industry sources today place that region’s total gas in place closer to 1,000 TCF. The standout example of dramatically more aggressive producer expectations is BC’s Horn River Basin, where Muskwa shale appears to have the greatest potential. Recent announcements by key landholders such as Apache, Devon, EOG Resources, EnCana, Quicksilver, and Imperial (some with substantial shale experience) indicate that Horn River Basin’s ultimate shale gas recoverability factor will range between 20% and 30%. That range would put recoverable gas at 20-40 TCF — potentially above the 25 TCF of proven gas reserves behind the proposed Alaska Gas Pipeline, which would cost some $30 billion.

Shale gas in British Columbia is not the only gas source to benefit from technological advances. Tight sand formations already have become driving forces behind WCSB output. Yet, their march has been muted in part by the lack of an official tight gas definition in Canada. Instead, the focus of unconventional gas has been CBM, which imminently will pass the baton to shale and tight gas. Meanwhile, the leadership behind the next decade’s CBM expansion will pass from Horseshoe Canyon to Mannville’s more challenging extraction but vastly larger potential recoverable resources.

The study’s “bottom line” produces a striking contrast to the many gloomy assessments of the WCSB’s gas production prospects. Despite an expected further erosion of gas deliverability from conventional resources, PIRA’s assessment foresees a fundamental transition toward expanding total WCSB gas production between now and 2020 thanks to sizable incremental contributions from shale gas and tight formation gas.


A New Assessment of Pipeline Prospects and of Regional Basis
Different supply scenarios raise the prospect of renewed pipeline-capacity constraints and, thus, potentially negative consequences on regional basis at key pricing points. The study provides an in-depth infrastructure assessment focused on the timing and impact of specific pipeline projects, including Mackenzie Delta, the Alaska Gas Pipeline, REX, and new pipeline capacity expected from the Rockies (a pivotal part of PIRA’s regional price evaluations). We also identify anticipated locations of new pipeline capacity.

Regional prices in western Canada depend heavily on when and where capacity is added vis-à-vis the size and timing of new LNG terminal capacity, particularly on the St. Lawrence River supplying Quebec, as well as on future production dynamics and local demand. By focusing on these issues, the Western Canadian study highlights similar infrastructure issues to those addressed in the first two installments of The Changing Face of North American Gas Supply series — on the Rockies and the Gulf of Mexico — giving subscribers insights into how these factors will affect future Henry Hub pricing and basis. Based on the findings of this study, prices and regional basis differentials are updated through 2020 for:
  • Gulf of Mexico (Henry Hub)
  • Alberta (AECO)
  • Pacific-Northwest (Malin and Sumas)
  • California (PG&E Citygate, and SoCal)
  • Rockies (Opal and Cheyenne Hub)
  • San Juan (El Paso non-Bondad)
  • Permian (Waha)
  • Midcontinent (PEPL TX-OK)
  • Midwest (Chicago)
  • Ontario (Dawn)
  • Northeast (Transco Z6-NY & Algonquin Citygate)
  • Appalachia (Dominion)
In sum, “Dawning of a New Era: The Outlook for Western Canadian Gas Supply and Exports” examines the driving forces behind WCSB gas-oriented drilling, the potential for unconventional gas supply expansion, the outlook for Arctic pipeline development, together with issues such as LNG terminal development, Mackenzie Delta and Alaska’s North Slope gas prospects, pipeline assets, infrastructure investments, and regional gas prices. By gaining new insights into these issues, study subscribers will be able to make informed decisions related to the future financial performance of western Canadian regional gas assets, including trading and marketing activities, basis management, firm capacity commitments, acquisitions, expansions, gas processing and electric power projects.
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Who Will Benefit from The Changing Face of North American Supply

The stakes are high when it comes to making decisions regarding future North American gas balances and basis pricing. Inevitably, market participants will end up on either side of multi-million-dollar gains or losses. THE CHANGING FACE OF NORTH AMERICAN GAS SUPPLY helps them keep ahead of the competition through a better understanding of the future interplay between regional gas balances, related infrastructure issues, and regional gas pricing. Those market participants include:
  • Gas Producers know the importance of maintaining an in-depth knowledge and sensitivity to prospective regional shifts in North American gas supply in the process of developing E&P strategies with emphasis on maximizing returns on assets. The studies help producers identify and evaluate the risks of future pipeline-capacity constraints and their impact on regional pricing.
  • LNG Suppliers and Marketers need to keep ahead of regional supply/demand dynamics involving potential transportation constraints and thus affecting marketing strategies to maximize exporter netbacks. The studies also assess the strengths and weaknesses of competing LNG projects.
  • Pipeline Companies that anticipate constraints and surpluses in pipeline corridors will have a strategic advantage when valuating assets, targeting potential acquisitions and planning expansions. The studies help clarify the competitive challenges and opportunities facing those pipelines.
  • Gas Distribution Companies face difficult choices regarding the purchase of new supplies and/or the renewal of existing supply arrangements. The studies assist them to conclude optimal terms under which supply can be contracted given the dynamics of regional competitive forces.
  • Gas and Power Marketers need timely insights into how changes in regional gas supply and costs will impact the value of portfolios as well as marketing strategies and trading desk risks.
  • Electric Generators and Other Gas End-Users constantly must consider how changing regional gas supply dynamics will influence pipeline service choices, transportation and siting options. The studies make end-users better equipped to adapt to supply shifts, rather than respond to crises, and help new project developers make more effective evaluations of fuel supply options and project viability.
  • Financial Institutions must make sound evaluations of how changing market conditions will affect the economics and financing of new drilling, gathering and pipeline ventures.
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DATA SOURCES

Gas supply and demand data for “The Changing Face of Gas Supply” come from U.S. federal and state agencies, as well as agencies in Canada and Mexico. Transportation data generally comes from LCI’s Database Service, and gas production models reflect proprietary data developed by LCI.


WHAT DO STUDY SUBSCRIBERS RECEIVE?

For each regional study purchased, subscribers will obtain a valuable set of services:
  • WORKSHOP. PIRA/LCI will host a workshop to discuss the preliminary findings of each regional analysis. During and after each workshop, subscribers are encouraged to make suggestions concerning the content and findings. Three (3) participants from each Client organization will be invited to the workshop. Clients ordering the study after the workshop would receive a CD-ROM version of the presentation material.

  • ONLINE PRESENTATION. Prior to the release of the final report, PIRA hosts an online conference call (via WebEx) to discuss the final conclusions and findings of each regional study, including production forecasts and associated impacts on pipeline transportation and capacity, LNG demand, and regional flows and basis.


  • REPORT. Clients receive 3 copies of the final report, which spells out the findings of the regional market analysis, recaps the workshop’s content, and discusses key uncertainties that impact the major findings. The reports link the regional forecasts and alternative cases to PIRA’s overall North American gas market Reference Case.

  • DATABASE. Clients receive 3 copies of a CD that will provide historical and forecast region-specific supply/demand and basis point pricing data through 2020. Where available, gas production is analyzed and forecast down to individual field levels along with volume flows on specific pipelines.
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FEES AND OPTIONS

  • “The Outlook for Western Canadian Supply and Exports” — as well as any other study in the series — can be purchased on its own or in any combination of regions.

  • Existing PIRA and LCI retainer clients receive a reduced price on all packages.

  • Fees for purchasing multiple regions are discounted for all subscribers.

  • Purchasing a study before the early-bird deadline provides a further discount.

For detailed service pricing, click here.
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ABOUT PIRA ENERGY GROUP
PIRA Energy Group, founded in 1976, is an international energy consulting firm, offering Retainer Client Services as well as customized consulting on a broad range of subjects in international oil, natural gas (and LNG), coal, and electricity markets and on related environmental issues. PIRA provides evaluation of key U.S. and international energy issues that impact the behavior and performance of the industry and its various markets and sectors. Currently, more than 540 companies worldwide subscribe to PIRA Client Services, including international and national integrated oil and gas companies, independent producers, refiners, marketers, oil and gas pipelines, electric and gas utilities, industrials, trading companies, financial institutions and government agencies.

PIRA’s North American Natural Gas Group
Gregory J. Shuttlesworth (Executive Director) oversees PIRA’s research covering all aspects of North American natural gas fundamentals. His work is aimed at providing PIRA clients with timely analysis of how fast-breaking events will impact gas supply and demand, inter-fuel competition, and the outlook for gas prices. His professional career centered on global petroleum and related energy economics before starting PIRA’s North American Natural Gas Group. He held the positions of Senior Analyst at the petroleum-consulting firm of W.J. Levy Associates and Energy Economist at the Chase Manhattan Bank. Greg holds B.A. from Johns Hopkins University, an M.B.A from Fairleigh Dickinson University and completed post-Masters studies in economics at NYU.

Richard M. Redash (Managing Director) has over 15 years of energy industry experience. His responsibilities center on fundamentals analysis and leads PIRA's regional natural gas market coverage and basis analysis. Rich came to PIRA in 1999 from Prudential Securities, where he was Vice President of Energy Futures Research and responsible for fundamental research of the NYMEX energy complex. Previously, he was an analyst within the Research Department of NYMEX with responsibilities centered on North American natural gas markets, as well as crude oil and petroleum products. Prior to NYMEX, he was a gas market analyst at Consolidated Edison of New York. He is a summa cum laude graduate from Pace University with a Bachelors of Business Administration and holds an MBA with distinction from New York University.

Harvey L. Harmon (Senior Director) has over 25 years of energy industry experience. Before joining PIRA, he worked at the U.S. DOE as Director of Natural Gas Import/Export Activities and Senior LNG Policy Advisor. He joined the Global LNG unit of El Paso in 2001 and was responsible for competitor and market analysis until 2003. He has been a consultant for Shell Gas & Power on LNG issues. Previously while at Tennessee Gas Pipeline and El Paso, he spearheaded numerous studies of demand, pipeline capacity and transportation issues with emphasis on competition at citygate markets. Earlier in his career at Fluor Daniel, he spent several years in Saudi Arabia designing offshore platforms. Harvey holds a M.S. in ocean engineering from the University of Wisconsin and an M.B.A from the University of Texas.

Ekrem A. Esmen (Senior Analyst, North American Electricity and Natural Gas) is responsible for Canadian gas production in PIRA’s short-term forecasts. He has developed weather-driven regional load forecast models and created numerous databases focusing on global weather and hourly ISO data. In addition, he has authored multiple articles on gasification, coal liquefaction, and carbon capture and storage potential on a global level. Prior to PIRA, Ekrem was a visiting engineer at the Massachusetts Institute of Technology, where he also completed his graduate studies in mechanical engineering.

Jane Hsu (Senior Analyst) was a Systems Analyst for Strand Management Solutions prior to PIRA. At PIRA she focuses on North American natural gas fundamentals and is responsible for maintaining and updating PIRA’s detailed North American supply/demand balances as well as numerous analytical models that represent the backbone of PIRA’s near-term and longer-term forecasts. Jane has a BS degree in computer science from Columbia University.

Breanne Dougherty (Senior Analyst) is responsible for the analysis of North American gas market fundamentals, including demand, production, and imports, with a particular focus on Canada and global gas balances. Before coming to PIRA in 2007, she worked for the National Energy Board of Canada, and she was recently involved as a supply/demand technical specialist in several of the NEB’s public facilities and toll hearings on natural gas- and LNG-related applications. Breanne holds a BCOM concentrated in international business and strategic management from McGill University.

Tai Liu (Senior Analyst) is responsible for PIRA’s weekly natural gas storage forecast and contributes regularly to the North American Gas Group’s weekly and monthly reports. Before joining PIRA in 2007, Tai worked at the natural gas hedging desk at Consolidated Edison of New York and was responsible for conducting fundamental research and analysis on the natural gas market. Prior to Con Edison, Tai worked at NYAM, a commodities options trading firm, where he executed trades and managed option positions for traders. Tai holds a BS degree from New York University, where he majored in finance and accounting.


ABOUT LIPPMAN CONSULTING
From a modest beginning in 1996, LCI has become the nation’s largest consulting firm specializing in, and the premier provider of, natural gas supply statistics. It has a diversified staff of 19 professionals, including three engineers, who provide monthly gas production data for all of North America with details by specific basin and by field as well as by type, conventional and CBM. LCI also provides monthly gas flow data for over 50 pipelines, encompassing all major North American gas transmission systems. In addition to having the largest gas supply database in the industry, LCI has two forecast models: one for domestic natural gas production and the other for gas transmission operations. LCI services a large client base, from governmental agencies to producers, pipelines and marketers. For more information on LCI, call (915) 838-1619 or email LCI@LippmanConsulting.com.

George Lippman (President) is a nationally recognized gas supply expert with over 35 years of experience. He has extensive knowledge of the nation’s interstate pipeline system and has worked with the various major national gas flow models. Prior to establishing LCI, Mr. Lippman worked in various capacities for the El Paso Natural Gas Co. He is a participating member of various committees dealing with national gas supply issues throughout North America. He has served as the Chairman, Rocky Mountain section of the American Gas Association’s Committee on Natural Gas reserves and is currently serving on the Potential Gas Committee. He has worked with the Gas Research Institute (GRI), the Canadian Energy Research Institute (CERI) and the California Energy Commission (CEC). Mr. Lippman holds a BS degree from the University of Arizona School of Engineering.

LCI’s engineering staff includes John Uxer and Jeff Peace, who are Registered Professional Engineers in Texas and New Mexico, respectively. Both hold BS degrees and MS degrees in engineering from New Mexico State. Collectively, they have over 50 years of experience in reservoir and gas storage analyses and drilling as well as in production and pipeline operations, particularly in the western U.S. Both have served on the Potential Gas Committee (PGC) and Pipeline Research Committee (PRC) and on AGA committees. They have made numerous presentations on natural gas issues to audiences across the U.S.

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