Shale Drilling Moves North, Upending Canada Gas Forecasts

OTTAWA (Dow Jones), Feb. 23, 2010

An unconventional drilling technique that sparked a boom in U.S. gas production has made its way north.

Companies in Canada, the world's fourth-largest natural gas producer, are turning their attention to gas trapped in shale rock. In the U.S., the emergence of horizontal drilling and high-pressure liquid injections into these formations helped fuel the boom in gas supplies and subsequent bust in prices.

The rise of shale gas in Canada further blurs an already uncertain outlook for the natural gas supply-and-demand balance in North America, leading some companies to seek a way out of a market that historically has been self-contained. It also represents a stark reversal of previous forecasts, some of which predicted that the decline in Canada's conventional gas supplies would force it to become a net importer of gas by 2030.

"There's still a bit of consternation, or an attitude of 'wait-and-see,' among many people who are wondering whether this explosion in shale gas activity is going to last," said Mike Dawson, president of the Canadian Society for Unconventional Gas, an industry group.

Unconventional gas extraction techniques were proven on a large commercial scale starting five years ago in the Barnett shale in Texas, and soon spread to other U.S. basins. In Canada, EnCana Corp. (ECA), Nexen Inc. (NXY) and Talisman Energy Inc. (TLM) are among several companies gaining traction in the Horn River and Montney shale formations, both in British Columbia.

"Shale gas has a fairly short history of production," Dawson said. "[Companies] are projecting stable production for 20 to 30 years, but we don't have a history of that kind of long-term production to say that with any certainty."

Over the course of six months last year, Canada's National Energy Board shifted from a prediction that the decline in conventional gas output would far outstrip new shale supplies, to saying that shale gas could satisfy domestic demand "far into the 21st century" and spur exports of liquefied natural gas.

What changed is that new drilling, almost all of it in shale gas, picked up again as natural gas futures doubled from a low of $2.41 per million British thermal units in September to above $5/MMBtu.

The shifting landscape is forcing investors to rethink projects. A gas shipping terminal in the city of Kitimat on Canada's West Coast was originally planned to import gas, but in 2008 the terminal owners, Kitimat LNG Inc., realized that shale gas could boost Canada's output and redesigned it to export LNG. The C$4.1 billion project is scheduled to begin construction this year, and to begin operation in 2014.

Houston-based Apache Corp. (APA) last month bought a 51% stake in the terminal, and reserved half its capacity. The terminal will be designed for a throughput of 700,000 million cubic feet of gas a day, or 5 million metric tons of LNG per year. And EOG Resources Inc. (EOG), an independent oil and gas company also based in Houston, signed a memorandum of understanding to supply gas to the terminal from its assets in the Horn River.

"The mass resource that has come about with shales has changed the scenery in the gas market," said Tim Wall, president of Apache's Canadian division. "[Kitimat] gives us an alternate market for our gas."

Others are betting that gas extracted using more traditional methods, albeit in remote locations, will continue to be a viable source. Pipeline company TransCanada Corp. (TRP) is working with Exxon Mobil Corp. (XOM) to build a route that would bring gas from Alaska to Canada. BP PLC (BP) and ConocoPhillips (COP) are working on a competing project.

"Our view is that you need all the shale gas, you need all the frontier gas and you probably need LNG [imports] on top of that," TransCanada Chief Operating Officer Russell Girling said at a recent conference in British Columbia. Girling said any excess supplies will be eaten away by the decline in conventional gas, the growing demand from Canada's oil sands industry--which uses natural gas to create steam for bitumen extraction, and new demand from utilities and the transportation sector.

Too much gas or not, Canada will likely have to find more customers for its gas, since its traditional buyer, the U.S., is oversupplied. Recent NEB data show that Canadian gas exports to the U.S. declined 11% in the first 11 months of 2009 compared with the same period a year earlier. Canada produced an estimated 6.29 trillion cubic feet of natural gas in 2009, down 10% from 6.97 trillion cubic feet in 2008.

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