The other alternative energy: natural gas
How abundant, low-cost natural gas could rewrite the energy playbook
Illustration by Kelly Sutherland
A ray of hope has broken through the gloom hanging over natural gas. But at first sight the beacon is still too faint to restore the old glow to the former darling of investors and faded star generator of vanishing Alberta government royalty revenue surpluses.
Abundant supplies, sluggish consumption in a lame economy and mild weather called off the annual North American gas rally this fall. As benchmark Alberta prices stagnated in a distress range of $3-$4 per thousand cubic feet, or less than half of the peak annual average of $8.55 that ignited the last drilling rush in 2005-06, previously bullish forecasters such as FirstEnergy Capital Corp. turned bearish and predicted more lean times in 2011. When 2010 third-quarter corporate statements registered the effects on earnings, skittish stock exchanges discounted shares of even Encana Corp., a Canadian gas blue chip that stands out as one of the world’s top producers with vast assets that make it able to spread costs thin over high production and capable of responding to market conditions across North America.
The bright spot is an industry barometer watched only by veterans that take a long view of the cleanest fossil fuel. In a signal that the worst is over, an international trade scorecard kept by the National Energy Board (NEB) shows that Canadian exporters have all but arrested the decline in their pipeline deliveries to the United States – the growth engine that takes up to two-thirds of production in good gas times.
The slippage slowed down to a marginal 1.5 per cent dip in volumes during the first nine months of the 2009-10 international contract year ending Oct. 31. A year earlier, the NEB record showed that during the comparable period of Nov. 1 through July 31 of 2008-09 Canadian sales into the U.S. plunged eight times faster by dropping 12.5 per cent.
This summer, exporters turned the trade trend around completely as American supply growth tapered off while heat waves raised demand for gas to fuel power plants that fired up in response to high electricity demand by straining air-conditioning systems. July Canadian gas exports hit 276.7 billion cubic feet, up 3.7 per cent from 266.9 billion in the same month of 2009. Summer consumption also rebounded north of the border, Statistics Canada reported. August sales volumes inside Canada topped 157 billion cubic feet, with increased industrial, commercial and residential demand up an overall eight per cent compared to the same month in 2009.
In the international gas trade, the NEB charts show that during the first nine months of the 2009-10 contract year sales volumes flattened out. Exports were 2.46 trillion cubic feet compared to 2.498 trillion during the November-July period of 2008-09. Prices also stopped plunging. At the U.S. boundary, the 2009-10 nine-month average fetched by Canadian gas was US$4.83 per thousand cubic feet, up 1.1 per cent from $4.78 during the comparable period a year earlier.
Even more than on the sales volume front, a turn towards price stability is a dramatic improvement on previous setbacks. During the first nine months of the last trading year of 2008-09, the average price for Canadian gas exports plummeted by 47.2 per cent to $4.78 per thousand cubic feet from $9.05 in November-July of 2007-08.
The combination of relatively reliable sales volumes and prices has likewise shored up Canadian gas export revenues. Pipeline deliveries to the U.S. in the first nine months of the 2009-10 contract year fetched US$11.98 billion, which was within one per cent of the $12.03 billion received during the same period of 2008-09.
Exchange rates were responsible for the last element of notable adversity left in the gas trade, from the Canadian point of view. The steady rise in the loonie and drop of the U.S. dollar, towards near-par, continues to erode the value of international sales as measured in the exporters’ home currency. In Canadian funds, average gas export prices fell by 13.2 per cent to $4.69 per gigajoule in the first three-quarters of the current contract year from $5.40 for the same period of 2008-09. As measured in loonies export revenues dropped by 14 per cent to $12.476 billion during November-July of 2009-10 from $14.6 billion during the same period of 2008-09.
But even the bleak currency and financial sides of the international gas trade were bright by the severe standard of deterioration set last year. During the first nine months of the 2008-09 contract year, border prices in loonies plunged by 36.2 per cent to $5.40 per GJ from $8.47 per GJ during the comparable period of 2007-08. Export revenues plummeted by 44.1 per cent in the first three-quarters of the 2008-09 contract year to $14.5 billion from $26.1 billion in November-July of 2007-08.
The stabilization of production, prices and revenues at lower levels than the spectacular peaks of the early 2000s fits a pattern described by prominent Alberta political scientist Roger Gibbins, president of the Canada West Foundation. The industry is going through a “transformative” period that will change public perceptions of the cleanest fossil fuel, and not least the willingness of markets to rely on it as a stable and reasonably priced energy source. “Your future is as much about politics as it is about economics,” Gibbins told a well-attended fall industry conference held in Calgary by the Canadian Society for Unconventional Gas and the 117-country International Society of Petroleum Engineers.
The supply revolution brought on by new technology for tapping “tight” gas embedded in shale, coal and other difficult geological formations is unlikely ever to be widely understood in detail. But, “The one message that comes across loud and clear is that there is a lot of gas out there,” Gibbins said.
Among the slow but sure changes that he foresees, the popular view of renewable energy sources as quick cures for environmental drawbacks of more carbon-rich fossil fuels will fade. Abundant, reasonably priced gas is bound to undermine the competitiveness of exotic green technologies and make subsidies required to implement them rise to potentially politically unpalatable levels.
As the new gas technology spreads into hitherto untapped regions rich in tight geological formations such as Quebec and the Maritimes, it has potential to cool off old Canadian regional political conflicts caused by energy resource wealth being heavily concentrated in one area. More dispersed development can make a big difference by putting the fossil fuel industry’s emphasis more on talent and less on location, Gibbins suggested: “It changes the political landscape. It takes heat off Alberta.”
More widespread, abundant natural gas development also spells changes to green concern as a political force, he says. “We shift from big-E environmentalism to small-e – from the abstract to the concrete, from Copenhagen [wrestling by the United Nations with global climate change policies] to what happens to the guy in upstate New York. We’re moving to an immediate concern.”
Chief energy economist with ARC Financial Corp. and Calgary author Peter Tertzakian
Photo: Colin Way
The next waves of environmental issues are above all about water quality and supplies which are far more tangible than carbon traces measured as invisible parts per million of the planetary atmosphere. As a natural resource, “People see it differently. It has spiritual, almost religious values not seen in oil, gas and coal. It’s more local but even more contentious because people’s immediate lives will be touched.”
Gibbins predicts that as public focus tightens on relationships between water and tapping gas with potent combinations of aggressive drilling and explosive geological injections of chemical fluids, “Governments will matter.” He urges industry to waste no time in preparing and spreading good explanations of its techniques and safety measures. “Fraccing is about the toughest word you can get. You can’t put nice bells and whistles on it.”
A similar picture of shifting public energy and environmental priorities was painted by David Manning, a senior international engineering consultant who is a former Alberta deputy energy minister and president of the Canadian Association of Petroleum Producers. In the U.S., political polls show declining public concern about global warming and environmental issues in general – except for water matters, reports Manning. Natural gas use is slowly but surely on the rise as confidence grows in having long-range supplies at reasonable prices among business and public services such as trucking, power stations and school bus fleets.
While fear and conflict over early stages of tapping shale gas spread into Quebec from New York State and Pennsylvania, the West is developing more of the stuff whether the industry wants it now or not. Canadian producers are switching exploration and development targets to oil but natural gas supplies are staying strong as a byproduct of increased drilling with improved methods that raise output of both commodities.
The 2010 total of new wells in the western provinces will be 11,587, up 40 per cent from 8,278 in depressed 2009, says a fall forecast by the Canadian Association of Oilwell Drilling Contractors (CAODC). The group predicts a repeat performance of the elevated activity in 2011, when 11,811 wells are projected. “There has been a significant shift towards oil-focused investment,” reports CAODC. In 2011 the association predicts “a continuation of oil-directed drilling,” with a focus on “tight” formations employing the new system of horizontal bores and rock-shattering “frac” fluid injections that was originally devised for shale gas.
A scorecard kept by the Calgary energy shares boutique of Peters & Co., which closely tracks publicly traded field contractors, shows that 37 per cent of Canadian drilling has become horizontal wells. Only five years ago the method was still considered experimental, useful chiefly in highly specialized formations such as deep oil sands deposits, and accounted for about six per cent of field activity.
The new targets are pie-like, thin but wide oil-bearing layers, often in well-known formations previously regarded as too embedded in dense rock to be within economic reach of conventional vertical drilling. An older variation on the new technology theme, directional drilling, is also on the rise by accounting for 30 per cent of Canadian wells.
CAODC reports that a 53 per cent majority of new wells taken all the way through completion into production this year have been targeted on oil. The proportion is a sharp about-face. The Canadian industry previously put up to 75 per cent of its exploration and development efforts into gas. But FirstEnergy research notes observe that the shift in targets is making little difference to gas supplies and prices. By late October, Canadian storage facilities were 92 per cent filled up. Weekly totals of injections into the warehouse reservoirs were about 23-per-cent higher this fall than a year ago.
An emerging industry pattern – of producing more gas whether or not it is the declared drilling target – shows in field activity visible within a one-hour drive northwest of Calgary. Amid spreading questions among farmers, ranchers and wealthy country acreage owners, about a dozen rigs – working for prominent independent producers such as TriOil Resources Ltd. and NAL Energy Corp. – are in hot pursuit of an oil-rich geological formation known as the Lochend with horizontal wells and fracturing fluid injections.
While detailed Lochend results remain confidential, the sustained high level of activity plainly points to successes. As a side effect, supplies of natural gas associated with the oil are on the rise. Industry plans, being discussed with residents of the area under mandatory community consultation rules, include a new gas pipeline connecting the primarily oil wells to processing plants that strip out liquids and contaminants such as hydrogen sulphide.
Venting or flaring off gas has long been restricted by Alberta regulation as a resource conservation matter, and ever-tighter environmental additions to the old rules virtually prohibit burning off even fugitive traces of unwanted oil-well byproducts.
As chief energy economist with ARC Financial Corp., Calgary author Peter Tertzakian is warning investors and Alberta royalty collectors against expecting any fast return to tight gas markets, price spikes and revenue windfalls. But the cleanest fossil fuel will regain its old mainstay role as increased supplies for reduced prices encourage growing consumption, he told the Calgary unconventional drilling and engineering meeting.
By about 2016-20, Tertzakian predicts gas will recover its former stature as an investment darling, with consumption growing and prices recovering to $6 per thousand cubic feet or more. At industry conferences, he recites a long list of lessons taught by the tumultuous first decade of the 21st century.
Not the least of the often painfully acquired wisdom which he urges the industry to remember is that relying on one energy resource should be avoided and that policy decisions on issues such as taxation, royalties and favored products can matter more than pure economics. “Government is the most influential force in the energy business.”