Gas Revolution No. 2: Canadian Shale

Some of the world’s largest oil companies are reinforcing analyst claims that Canada’s Horn River and Montney shale and tight gas formations have the potential to revolutionize that country’s gas future. A glut may be in the offing, but investors appear confident that gas will push aside coal in the U.S. power sector. Plans are even afoot that would see Canada join the ranks of the world’s LNG exporters.

There’s no shortage of executives from companies such as EnCana, Imperial Oil, Apache, Nexen, EOG Resources, Canadian Natural Resources and Talisman Energy ready to spread the message that Canada’s Horn River Basin could develop into North America’s best shale gas prospect yet, surpassing the Barnett, Haynesville, Fort Worth, Fayetteville and Marcellus plays of Texas, Louisiana and Pennsylvania. It is also attracting interest from majors. ExxonMobil – operating through its Canadian units - paid C$113 million ($106.3 million) in mid-2009 for eight Horn River licenses and quickly stirred interest when reports circulated of two major finds.

Just as in the U.S., Canadian shale gas is emerging as a “game changer” for gas supply on the North American continent. It has implications for LNG import demand - and potentially LNG exports - for coal-to-gas switching in the U.S. power sector and the timing of Alaskan and Arctic gas development. Even the most conservative shale resource estimates have prompted some experts to suggest that spending at least $58 billion on developing Alaskan North Slope and Mackenzie Delta gas will be pushed back 15 years or more from the projected start-up dates of 2015-2020.

Canada’s National Energy Board predicts that by 2020 shale and tight gas production will propel national output to 21 Bcf/d from 16.2 Bcf/d. BMO Capital Markets estimates that Horn River production alone could exceed 4 Bcf/d by 2015.

This contrasts with a much less optimistic short-term outlook. With conventional reserves in steep decline, 2 Bcf/d of new gas is needed annually just to hold the line, according to industry consultant Ziff Energy Group, which takes a more pessimistic view than other forecasters. Ziff Energy predicts that total gas output in the Western Canada Sedimentary Basin, the mainstay of Canada’s gas industry, will drop below 14 Bcf/d by 2020 from the current 16.2 Bcf/d, 70% of which is exported to meet 16% of U.S. demand.

The NEB estimates deliverability of Canadian gas will shrink by 9% a year over the next two years, despite an increase in gas drilling investment from C$5.76 billion in 2009 to C$8.51 billion in 2011 and an increase in gas-targeted wells from 4,170 to 6,495. Although lagging far behind the 2008 peak of C$12.89 billion on drilling and 10,179 wells, the short-term trend reflects Canada’s struggle just to slow the rate of decline. Over the next five to ten years, shale gas could turn that outlook around 180 degrees.

Reserve Estimates Balloon
Despite an exploration and development effort that has barely scratched the surface and the still-evolving use of horizontal drilling and hydraulic fracturing technologies, the guesswork on how much gas might be trapped in British Columbia’s shale gas deposits has attained stratospheric heights.