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Natural Gas Supply Costs in Western Canada in 2009
The average cost to produce natural gas supply from new wells drilled in Western Canada in 2009 was $6.97/GJ, which has decreased since 2007, said the National Energy Board in its most recent report Natural Gas Supply Costs in Western Canada in 2009. This report analyzes the average supply costs to producers for the production of natural gas from new wells drilled in 2009. The results of the report are an indicator of whether gas production is expected to increase or decrease as a result of 2009 market conditions.
Natural Gas Use in Canada
Natural gas is an important resource and is used in just about every aspect of daily life in Canada. It is usually found under layers of porous sedimentary rock thousands of metres below the ground. In Canada, natural gas is a major source of energy and is used primarily for heating in homes and buildings and in industry across the country, and increasingly for electricity generation.
Natural Gas Supply Costs and Prices for 2009
Average 2009 Supply Costs by Region
The average cost to produce natural gas in Western Canada in 2009 was $6.97/GJ. This cost has declined since 2007 when the average cost was $7.88/GJ. Supply costs can vary significantly from one area to another and from one resource to another. For most of 2009, the deeper tight and shale gas resources were cheaper to produce than shallow and coalbed methane (CBM) resources. Deeper resources require more costly wells to be drilled but tend to produce much more gas. Further, deep wells tend to have more room to decrease their costs and raise production rates through horizontal drilling and fracturing. On the other hand, shallow resources, such as those in Eastern Alberta or Saskatchewan, are more sensitive to land prices, as they cannot decrease their well costs through efficiencies or increase production rates. As a result, this past year the industry focused drilling activity in areas that would give them a better economic return. This was seen in the shift in natural gas activity (drilling) moving from Eastern Alberta and Saskatchewan towards Western Alberta and Eastern B.C.
Gas prices in North America have dropped mainly because supply in the U.S. has increased and has kept the market oversupplied. The average price of natural gas in Western Canada in 2009 was $3.76/GJ, much less than the 2007 average of $6.11/GJ. In comparison, the price of oil (per GJ basis) was almost three times the price of natural gas in 2009. This meant that producers had more incentive to drill for oil than gas. As such, gas drilling fell to less than 50 per cent in 2009 of total oil and gas drilling, which historically used to be about 60 per cent.
Average Supply Cost Components
Natural gas drilling activity in Western Canada remains low compared to the boom years of 2005 to 2008. The level of drilling activity is always dependant on two things: the price of gas and the cost to produce it. Natural gas drilling has continued despite lower prices. Some companies kept producing because they needed cash flow in order to continue to operate, whereas others anticipated that natural gas prices might rise. There were some companies that, before 2009, locked-in their production at higher prices (hedging) than the current market prices in order to make a profit. Other aspects such as a company having existing land or infrastructure in place also played a role in how they were able to profitably operate.
Supplies and Storage Capacity in North America
Natural gas in North American continues to have a strong supply surplus, which means this year's final storage figure could exceed last year's record of almost 4,500 billion cubic feet. These strong supply trends are mainly the result of increased knowledge of new resources, drilling efficiency improvements, the ability to drill multiple wells from one well site, and multi-lateral horizontal drilling.
Gas resources with higher natural gas liquids (NGL) content have continued to see increased drilling activity into 2010 since NGL pricing is tied to crude oil. As a result, these resources are more desirable to drill.
The Industry: Now and Looking Ahead
Natural gas producers are always looking for ways to expand and grow their operations. One way they do this is through acquiring assets from another company. This trend is expected to continue into 2010, especially in the deeper tight gas and shale gas developments in Canada and the U.S. This is largely due to major producers wanting to increase their infrastructure or land holdings in order to operate on a larger scale and benefit from scale efficiencies. Joint ventures have also benefited the natural gas industry, as foreign investors have teamed up with Canadian and American shale gas producers to earn positive returns and gain knowledge of natural gas production.
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