CERI: Offshore access in North America still major deterrent for gas producers

Restrictions on exploration access to offshore areas to increase North American natural gas reserves is a major and continuing obstacle, says a senior energy consultant and analyst.

Potential areas of exploration that are now banned include parts of the US Gulf Coast, Florida, off the Carolinas, and Canada's Vancouver Island, noted Loren Cox, associate director, program development, for the Massachusetts Institute of Technology's Center for Energy and Environmental Policy Research. Cox spoke to a conference sponsored by the Canadian Energy Research Institute in Calgary last week.

Cox said production from relatively shallow waters is now "stable at best, and probably declining." He added that, it is possible ultradeepwater drilling could be prolific.

Another concern, he said, is that policymakers respond to short-term stimuli and polls in drafting energy policy.

Supply-demand factors

Cox warned that Canada's decision to ratify the Kyoto Protocol on Climate Change could be a "very painful one" and will put more pressure on the industry to produce more clean-burning gas. In Alberta, Canada's major energy producing province, Cox said there would be conflicting demands for gas supplies from the residential-commercial sector, the large petrochemical industry, and the huge volume of oil sands development now under way.

Cox said another factor in future gas supply-demand is that there is reason to think that utilities once again are looking at feedstock alternatives such as fuel oil and distillates. He said gas is the best choice, but other fuels offer utilities an alternative, and they would hedge if faced with a supply shortage and a spike in gas prices.

Cox further said the challenges facing the industry include an uncertain resource base, volatile markets, and potential short-term decisions by policymakers.

"Fasten your seat belts. We are in for a pretty turbulent ride," he concluded.

Drilling sector view

John Jacobsen, vice-president, operations, for Precision Drilling Corp., Calgary, said the drilling sector is ready to meet the industry's needs.

Jacobsen said in Western Canada it is mostly a good news story on the equipment side, with some challenges on the personnel side.

He said drilling contractors have been in a building phase over the past 10 years and that there were 681 units, excluding service rigs, at the end of 2003. He forecast a fleet of 692 rigs or more this year.

Jacobsen said the rig maintenance and manufacturing infrastructure is adequate. However, there are not enough crews—trained or otherwise—to staff rigs. Also, he said, there are serious unresolved issues about safety and training. He said the industry should focus on increased job and safety training.

Jacobsen said there is an increased demand for deep-drilling, 3,600 m rigs this year and that the industry has the capacity to meet that demand.

Peter Tertzakian, chief energy economist for ARC Financial Corp., Calgary, said, the emphasis on drilling for oil in the Western Canada Sedimentary Basin is diminishing rapidly in favor of gas. He noted that Boston and New York now get 70% of their gas supply from Canadian imports.

Tertzakian said the Canadian industry is "drilling up a storm" but is not producing more export gas. He said Canada has been unable to supply the US with more gas and that domestic demand also has risen.

The energy economist told the conference there has been a dramatic migration to shallow drilling in Alberta: to 75% in 2003 from 60% in 1996. There has also been an increase in high-cost, high-risk but potentially lucrative deep-drilling projects from 1% of total wells to 2%.

"Spending on deep wells is risky, but it could increase production substantially. There is a 1-in-10 chance of success. Shallow drilling is a treadmill on which incremental production is zero. Middle-depth wells are not easy, but have some promise," Tertzakian said.

The economist said that if the price of gas dropped to $4.50-5.00 (Can.)/ Mcf, drilling activity could fall 15-20% and would affect pricing in the North American market. He said future LNG imports could "clobber" the market and create price volatility. Gas production would then drop and prices would rise.

Tertzakian said there are two significant conclusions: All the low-hanging fruit in gas production is gone, and price fluctuations in one area can now affect the entire system.