The biggest energy surprise of 2008 is not the drop in oil prices by more than 60 per cent from US$147 a barrel into the current trading range in the $50s. The industry never believed the peak would last and was braced for a slide.

At investor conferences held at the summer height of the spike, oil sands project sponsors’ forecasts of performance by their plants were based on price assumptions of half or less the lofty summits hit by the commodity-futures markets. More than a year ago the head of the world’s biggest oil company, while visiting Alberta, described the ever climbing trading ranges of paper barrels as a house of cards built on unpredictable financial expectations.

“None of us know what oil prices are going to do,” ExxonMobil chairman Rex Tillerson told a news conference after addressing the 2007 edition of an annual fall blue-chip conference of industry and government leaders at Calgary business magnate Ron Southern’s Spruce Meadows equestrian center. “I cannot explain to you why we have $70 oil. The fundamentals (of supply and demand) support something much less.”

The industry is used to cycles. Only 10 years ago oil was in a long, deep trough that was also made by a combination of faltering debtors, weakened banks and expectations that defied common sense. Oil averaged about US$15 a barrel in 1998. There was an Asian financial crisis. There was widespread conventional wisdom that except for new-wave developments such as windmills and fuel cells, energy was a sunset industry about to be eclipsed by a “new economy” of dot-com giants manufacturing digital wealth in an “e-dustrial revolution.”

The most startling development of 2008 ‑ and the one with potential to make a difference in the long run ‑ has been a complete about-face in the outlook for natural gas. This change is in tangible supplies, not financial expectations and popular perceptions. This is the commodity, and not oil, that has long driven up to three-quarters of western Canadian drilling. Gas has also accounted for up to three-quarters of Alberta resource royalties. Gas price spikes generated the colossal revenue surpluses that enabled the provincial government to become debt-free and able to save again by paying off the legacy of mounting deficits left over the hard times of the 1980s and ’90s.

Enter “unconventional gas,” which is rapidly turning from a sideshow into the main event. First it was coalbed methane, making a start on replacing dwindling supplies from aging wells. Now comes gas from previously impenetrable shale rock layers. In the United States, shale gas production has gone from zero to an estimated 6.5 billion cubic feet a day in the past few years and continues to grow at an accelerating rate. That output is already 50 per cent greater than the deliveries that were supposed to come from the stalled Alaska pipeline megaproject and more than five times the volume planned for Canada’s much-delayed Mackenzie Gas Project. The new gas production techniques are being rapidly transplanted from Texas into Canada, initially into northern British Columbia where the provincial government this year enacted a gas counterpart to Alberta’s encouraging royalty regime for the oil sands.

At the annual meeting of the Petroleum Services Association of Canada, analysts Roger Serin of TD Newcrest and John Tasdemir of Tristone Capital suggested gas prices will take longer to recover from current lows than oil.

This week’s annual technical conference of the Canadian Society for Unconventional Gas drew more than 750 experts. A standing-room-only crowd did not quarrel with startling projections by industry veteran Dave Russum, geoscience vice-president of AJM Petroleum Consultants.

The scarcity mentality that not long ago spawned more than 50 proposals for new U.S. and Canadian terminals for tanker imports of liquefied natural gas from overseas has evaporated. The talk now is about converting the projects into export ports for loading up cargos of LNG made from shale gas to sell to Asia.

“Unconventional gas is going to be a huge part of our future,” Russum predicted.

That future may not be all rosy, especially if conventional supplies also hold up and there is a lag in developing increased demand such as forecast growth in gas-fired power as a substitute for coal-burning electricity plants.

The U.S. could wind up with a gas surplus, Russum calculated. Unconventional gas is increasing supplies at a time when economic recession appears likely to reduce demand. American exploration and production firms are announcing cuts to drilling budgets. Just how long a glut might last can only be guessed at. But it will be painful if it happens, and felt by industry and government alike.

Gord

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