Western Canadian Supply Analyses:

Accounting for almost one quarter of the total natural gas production of North America in 2005 Western Canada is an important source of natural gas supply.

New gas wells in Western Canada continue to be essential for maintaining North American gas deliverability. Since most of the very large gas wells have already been found in North America there is an ongoing trend of year-on-year decrease in initial productivity from new gas wells. This is because the newer wells that are found tend to be smaller and therefore they deplete quicker. This also means that drilling must increase every year to sustain the levels of deliverability required to meet demand. It is expected that drilling activity directed toward conventional gas resources in the western Canada in 2008 was 8 percent higher in 2006 than 2005.

Despite the projected high levels of drilling in the Western Canada Sedimentary Basin (WCSB), it is expected that the production of conventional natural gas from the traditional gas wells will decrease almost 3% by 2008. We are relying on newer, less proven sources of natural gas such as Coal Bed Methane to increase during the period to keep Canada's gas diver ability stable. New well connections are shown in red in the chart below.

natural gas deliverability chart
Source: National Energy Board

Challenges:

Volatility of gas prices pose a challenge for the drilling plans by exploration companies. During periods when prices are low they have difficulty justifying the money spent on drilling activity. Thus low prices can often be followed by higher price cycles.

natural gas price at AECO versus rotary rig Count
Source: National Energy Board

Escalating Costs. Western Canada's natural gas industry is facing cost escalation in many areas. Some costs cost escalation is non discretionary and reflects upward cost pressure on key inputs such as steel and fuel. This component of cost escalation is generally due to factors beyond the industry's control and is likely to persist or worsen in future years. Another key challenge is the greater labour recruitment and training costs to meet the need for new workers in the area

Links:

National Rotary Drill Rig Counts