Canada's Peak Natural Gas Crisis
Feeling the Pinch from Peak Natural Gas
The birth of Canada's natural gas industry actually started by accident.
At the time, the Canadian Pacific Railway was sniffing around for water to use at its transcontinental railway. Drilling a little over 30 miles northwest of Medicine Hat, Alberta, workers didn't exactly find the water they were expecting...
Instead, they struck gas.
Thanks to its access to the Western Canadian Sedimentary Basin (WCSB), Alberta has remained the country's premiere energy producer, making up more than 75% of Canada's natural gas production.
Although it's been roughly 123 years since the country's first natural gas well was drilled, Canada's conventional natural gas production could be hitting hard times — the consequences of which could have several serious implications...
The Reality of Peak Natural Gas
To say that Alberta is attune to the North American natural gas market would be an understatement.
The province has more than 24,000 miles of pipeline in place.
So what's the problem?
Two years ago, we talked about how Canada's future natural gas production was in trouble...
You see, Canadian natural gas production peaked in 2001 at a little more than 17.4 Bcf per day. According to production stats from Canada's National Energy Board, that means the country's production has declined nearly 20% since the peak. Production during 2010 averaged 14.4 Bcf per day.
Now, don't think they aren't trying...
We've seen before that it took a record number of natural gas well completions in the WCSB to help boost marketable natural gas production to near peak levels. Within the last six years, however, that number has dropped by more than half.
And we can't exactly blame a dearth in drilling rigs...
You can see that the total number of rigs operating in Canada hasn't changed dramatically over the years:
And things gets worse...
The base decline rate for Western Canada is an ever-increasing reminder that drilling isn't as easy as it used to be. Within the last two decades, the base decline rate has jumped 66%.
Furthermore, the first-year decline rates have more than doubled during the same time frame for natural gas wells in Western Canada.
click image to enlarge
Those figures don't stand much of a chance of improving.
The problem is that an overwhelming amount of Canada's conventional natural gas production comes from the WCSB, and most of the large gas discoveries have been found already. It's only a matter of time before reserves are exhausted.
Of course, declining natural gas production in Canada has several implications...
Why Fear the Peak?
Natural gas will play a crucial role in Canada's energy picture over the coming years. Judging from the growth in oil sands production, that's pretty much a guarantee...
It's no secret to us that Canadian oil sands production is pivotal for meeting increasing U.S. demand. In fact they'll soon be shipping us more than three million barrels a day.
Natural gas exports to the United States, meanwhile, have plateaued — due mostly to the surge in shale gas activity in the U.S., which is projected to account for 45% of U.S. natural gas production by 2035.
Oil sands production, however, is quickly shifting from those environmentally frightening surface mining operations to in-situ methods.
According to its latest report on the oil sands by the RSC, in-situ production will soon be the leading source for bitumen production:
While that happens, there'll be an increasing demand for natural gas, which plays a crucial role in techniques like SAGD.
Typically, producers use natural gas to create steam to lower the underground bitumen's viscosity. These in-situ players access to 80% of the total bitumen resource.
Do we really think Canada is going to leave 1.7 trillion barrels of oil in the ground?
For this reason, Canadian in-situ companies like this up-and-coming oil sands stock — with over 700 million barrels of bitumen reserves and 1.4 trillion cubic feet of natural gas reserves — have a tremendous upside, even on a rare pullback in crude prices.
Later this week, we're going to see why the Canadian shale boom is starting to lose steam, hinting at a future dependence on U.S. gas.
Until next time,
Editor, Energy and Capital
Energy Demand will Increase 58% Over the Next 25 Years
After getting your report, you’ll begin receiving the Energy and Capital e-Letter, delivered to your inbox daily.