Figure 1: Annual Alberta natural gas production(extrapolated for 2007).
Alberta has been producing roughly 168,000 million m3 of natural gas per annum over the last five years as shown in Figure 1. Looks nice and stable with natural gas prices in North America being also rather low. No problems seen thus far.
Figure 2: 'Capable' and 'Operating' wells in Alberta.If we look at the actual number of wells in the province, as shown in Figure 2, it has grown greatly over the past five years, even as production has not. There are two discontinuities in the data, the origin of which are not clear. I presume it is due to some accounting methodology change. The number of operating wells has grown from roughly 61,000 wells in January 2002 to 101,000 wells in June 2007.
Given the flat production figures, and 65 % growth in the number of operating wells over 4.5 years, the rate of decline for production per well is 11.2 %/annum. That's assuming production has been flat. If you take into account the observed decline from 170,828 million m3 in 2002 to the projected 166,795 million m3 in 2007, the rate of decline for production per well is 11.7 %/annum.
On the positive side, the difference between the number of available wells and those actually producing gas appears relatively stable. If this gap started to tighten up, it would suggest there is no more surplus capacity in the infrastructure. The natural result would be a rise in North American natural gas prices, notwithstanding the influence of LNG.
As an aside, the first coal-bed methane wells began to appear in December 2004. There are 7850 operating coal-bed methane wells as of August 2007, forming 7.6 % of the total wells at that time.
Figure 3: Drilling rates for new development (production)and exploration of natural gas wells. End-points of moving
averages not considered statistically accurate.
So we have clearly established that for Alberta to maintain its natural gas production, it will need to drill more and more holes in order to offset the decline in existing fields. Unfortunately, the drilling data suggest that isn't going to happen. Rather, drilling rates for new production holes has dropped off from about 950 holes per month in 2005 to 650 holes per month now, a decline of about 30 %. Exploration of new sites is also dropping off at a similar proportion.
Now, obviously, this data has a lot of noise to it. One particular feature of interest is the drop-off in drilling in April that happens every year. Since April is the end of the financial year in Canada, my best guess is that numbers are being shifted for tax purposes. Still, I think the 12 month moving averages are stable enough to draw the inference that drilling activity in Alberta has dropped substantially from the peak of the 'boom'.
In conclusion, the general treads are clear. Alberta had a boom in natural gas production with activity peaking in 2005. However, that peak in drilling is over, and existing reserves are depleting rapidly. The shortfall will be shored up by coal-bed methane, but that method of natural gas production inherently has smaller production volumes per hole, and requires more extensive drilling. The data from the US Energy Information Admission on Canada's natural gas reserves suggests that this decline is being driven by geological considerations (i.e. we're running out of conventional natural gas) rather than the purely historical 'boom-bust' cycle of Alberta's economy.
The future of the natural gas industry in Alberta will, in my opinion, be largely determined by the degree to which liquefied natural gas (LNG) imports penetrate the North American market. If LNG can be delivered economically, Alberta natural gas will remain uncompetitive and this could be a real historical peak. On the other hand, if supplies tighten, prices will rise in much the same fashion as crude oil is now and we should see another boom period until the coal-bed reserves are fully covered.
Premier Ed Stelmach is to deliver a speech tonight regarding his decision on fossil fuel royalties in Alberta. I think that he has little choice but to raise royalties on bitumen producers, since otherwise he will face budget deficits in the future as the revenue from natural gas production declines.
4 comments:
This is a concise but powerful study of a serious problem. Thanks for bringing it to my attention.
A good study - several other people, even in the oil industry and academia also have concerns about declining production.
A minor point - the drop in drilling activities in April is not due to a tax situation, but more likely due to road bans during spring break up.
Thanks for the comment. The reason I thought it might be a tax issue was the rebound I observed in the July numbers. However, it is quite logical that driving large trucks over non-metaled roads while the snowpack is melting could wreck them rather swiftly.
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