As wells sputter, gas prices spurt - Output crimped as new wells at record low production
The Globe & Mail, Monday, December 15
By BRENT JANG
Investors wondering whether natural gas prices will remain in a historically high range this winter need look no further than the sputtering gas wells across Western Canada.
New gas wells in 2003 have produced at their lowest average daily rates on record, making it hard to maintain current output, says a study by Martin King, commodities analyst for investment dealer FirstEnergy Capital Corp. of Calgary.
During 2003, the gas wells started flowing at an average of 350,000 cubic feet a day, less than half the daily rate of initial production in the mid-1990s, according to the FirstEnergy report.
"The simple arithmetic of initial production rates being about one-half of those just six years ago is that it will take twice as many natural gas wells to meet the same level of production," Mr. King wrote.
"For producers, this is Big Problem No. 1."
High demand across North America, combined with tightening supplies in both Canada and the United States, suggest that gas producers will enjoy a robust average price in 2004 of $4.75 (U.S.) per million British thermal units, Mr. King said.
Amid cold weather, gas prices have surged 56 per cent over the past three weeks to $7.22 per million BTUs. Even if a warm front settles in and reduces that lofty price, the outlook is bright.
Calgary-based Peters & Co. Ltd. predicts an average gas price of $4.50 in 2004. That's lower than some forecasts, but still a vast improvement over trades of $1.25 in 1995.
With snowstorms pounding major parts of the U.S. Northeast and Atlantic Canada in early December, that further drained gas storage caverns.
Over most of the past five years, natural gas prices have been strong, with the exception of the last half of 2001 and early 2002.
Jim Osten, chief energy economist at Global Insight Inc., a research firm in Lexington, Mass., predicts that gas prices could average $5.50 per million BTUs in next year's first quarter, and average $4.75 over the full year. He cautioned that gas prices are notoriously volatile.
To soften the blow of rapidly depleting wells, some producers are diversifying into non-conventional gas output, such as coal-bed methane -- extracting natural gas from coal seams. The trend of lower initial output is expected to continue in 2004, when new western Canadian gas wells could average 330,000 cubic feet a day.
"The whole issue here is one of supply," said David MacInnis, president of the Canadian Energy Pipeline Association. "More supply is good news for pipelines."
Besides record-low initial production rates, another problem is the drop in output once gas wells are brought on stream.
With hundreds of shallow wells being drilled in Alberta and Saskatchewan, production on new wells dropped an average of 41 per cent during the course of 2003 in what's called the "first-year decline rate."
"The geological treadmill is turning ever faster, forcing producers to run -- that is, drill -- harder and faster just to keep natural gas production in the same place," according to Mr. King's report.
The decline rate in 1992 for new wells was 20 per cent, and in 1997, it was 31 per cent.
Strong natural gas prices over the past couple of years have made it profitable for producers to drill up a storm in going after the small gas pools.
Junior producers have been drawn more to natural gas than oil, even though oil prices have also rallied. In this year's third quarter, 61 per cent of the production of 68 juniors surveyed was for gas, said Iradesso Communications Corp., an investor relations firm.
With extra drilling needed to keep up with production, the National Energy Board forecast last week that Canadian gas production will be flat over the next two years.
Two notable exceptions to low initial production rates had been the Ladyfern natural gas field in northeastern British Columbia and the prolific Fort Liard gas play in the Northwest Territories, near the boundary with British Columbia.
Last week, Murphy Oil Corp. of El Dorado, Ark., announced that it will sell its conventional oil and gas properties in the West, including its Ladyfern gas wells, while ChevronTexaco Corp. of San Ramon, Calif., also unveiled plans to unload conventional assets, notably its fabled Fort Liard gas wells.
Murphy and two Calgary-based producers, EnCana Corp. and Canadian Natural Resources Ltd., are among the companies that led the way at Ladyfern.
The Ladyfern field, discovered in early 2000 by Murphy, peaked early last year at roughly 700 million cf/d, then declined to 450 million cf/d in early 2003 and has fallen to less than 150 million cf/d in recent months.
By the end of next year, "it will be a shadow of its former self with 30 or 40 million cubic feet a day," Mr. King said in an interview.
Ladyfern, lacking a concerted effort to extend its life, will be mostly depleted by the end of 2005.
Producers such as EnCana and two Houston-based companies, Burlington Resources Inc. and Anadarko Petroleum Corp., continue to be active in other parts of northeastern British Columbia.
In the Fort Liard area, ChevronTexaco has been the dominant player in what is still a relatively unexplored region, but there, too, daily gas production has tumbled from eye-popping initial rates.
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