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Canadian Gas Supplies Remain Tight

The potential for a short term natural gas supply shortfall was the likely impetus for the National Energy Board’s publication of “Short-Term Canadian Natural Gas Deliverability 205-2007”. The report’s conclusions provide a roadmap for speculation in the natural gas sector. The report uses the term NGC (natural gas from coal) which is equivalent to CBM (coalbed methane). Here are some of the conclusions of the report:

· The Board expects annual average deliverability of conventional gas to decline slightly over the projection period, from 474 million m3/d (16.7 Bcf/d) in 2004 to 467 million m3/d (16.5 Bcf/d) in 2007. This small decrease is expected to be more than offset by growth in NGC deliverability from 4 million m3/d (0.1 Bcf/d) in 2004 to 25 million m3/d (0.9 Bcf/d) in 2007.

· The deliverability outlook reflects the industry operating at practical maximum levels.

· Even with prices at current levels or higher, these constraints will likely keep Canadian gas drilling from rising faster than indicated.

· Initial productivity of new wells continues to decline and will require an increasing number of new wells each year just to hold deliverability constant.

· NGC deliverability will more than compensate for declines from conventional gas sources over the period.

· Over the long term, the flatter decline profile of NGC (and tighter gas) should help to slow overall basin declines somewhat.

· The province of Alberta and the industry are working at addressing drilling density, access to resources, noise, and other environmental aspects of the expected ramp-up in NGC activity.

Similar trends are present in the Rocky Mountain region of the US where tight gas and CBM production are growing rapidly. An important conclusion is that new drilling capacity will not stand idle due to overcapacity. The service companies continue to have pricing power, especially those offering services related to unconventional gas production.

Don’t be surprised to see natural gas spike up to $20 within the next 2 years.