Gas Prices Stay High As Supplies Fall
Natural gas warning from analyst: No relief expected for two years as cold snap puts pressure on North American inventories
Claudia Cattaneo, Calgary Bureau Chief
Financial Post
Monday, February 24, 2003
CALGARY - Natural gas prices, which jumped to the highest levels in two years last week, are likely to stay high for another two years due to faster than expected declines in North American fields, according to a major new study.
This is increasing pressure on already tight inventories.
North American inventories are the tightest they have been in five years because the winter has been unusually cold.
"There has been an acceleration in the last few years of the maturing of [North American] basins," said Roland George, senior principal with Calgary-based research firm Purvin & Gertz, and author of a study of more than one million natural gas wells in North America.
"The biggest challenge we have is over the next two years, and that is why in our latest forecast we have a price level that is higher than the long-term sustainable level," Mr. George said in an interview.
Gas for March delivery jumped Friday by US44.4¢ to US$6.606 per million British thermal units (mmbtu) on the New York Mercantile Exchange, the highest since Feb. 2, 2001, after fire at an oil terminal in New York harbour, and amid expectations of frigid temperatures this week.
Wilf Gobert, vice-chairman at Peters & Co., said inventories in Canada and the United States are so low a crisis is looming by next winter if supplies aren't replenished.
"In less than six months, we have gone from the highest gas in storage to what will be the lowest in storage," Mr. Gobert said.
While prices are spiking on cyclical factors, Mr. George predicted the next two years will see prices remaining in a high US$4 mmbtu range, softening to the US$3 mmbtu range in 2005.
Finding and bringing on stream new sources of natural gas will be difficult in 2003 and 2004 because new discoveries from existing basins are smaller, more costly to find, and are depleting faster, Mr. George said. On average, natural gas fields in Canada and the U.S. are running out at a rate of 25% a year.
The supply picture looks more promising after 2005, he said.
By then, companies will have had time to crank up longer-lead time projects, like bringing to market gas reserves from the Arctic, offshore Atlantic Canada, the U.S. Gulf Coast or from unconventional sources like liquefied natural gas and coal bed methane.
If prices soar as they did two years ago, demand could decline as large industrial customers, in particular, switch to cheaper fuels, Mr. Gobert said.
But higher prices are what producers need to generate more activity to cover increased costs of finding reserves, Mr. George said.
Drilling activity in Canada was up 25% last week compared to a year ago, with 608 active rigs out of 668 available for hire.
The study also predicts:
- Conventional production from Alberta, Canada's largest energy region with output of 13.7 billion cubic feet a day, has likely peaked after rising for about 50 years. However, volumes will be sustained by a new source -- coal bed methane -- that could keep the basin from declining for a few more years.
- Volumes from Saskatchewan are flattening out at 600 million cubic feet a day.
- British Columbia, Canada's second largest natural gas source with production of 2.6 billion cubic feet a day, will see volumes increase significantly. Explorers see the northeast corner of the province, which recently produced the giant Ladyfern discovery, as less mature and believe there is the possibility of finding large fields.
- Offshore Atlantic Canada, which produces 550 million cubic feet a day, could see an increase by 2006 and 2007, if the Deep Panuke discovery, which was put on hold by EnCana Corp. last week, is developed, and if there are new finds.
- In the Northwest Territories, the Fort Liard area could double volumes in the next 15 years, to 300 million cubic feet a day. But the big increases will come from the Arctic in 2009 and 2010 if a pipeline is built.
The United States, which produced about 53 bcf a day last year, will see production from conventional sources flatten. New volumes will come from frontiers like Alaska, whose huge reserves are untapped because there's no pipeline to bring them to market, and the Gulf of Mexico, as well as unconventional sources like liquefied natural gas. |
