Natural gas: profits down, market to tighten 2009-2011

October 14, 2009   by PLANT Staff Report

Suncor Energy is cutting back on its natural gas business to concentrate on its Alberta oil sands operations.

Photo: Suncor Energy

Canada’s natural gas market will tighten over the next two years and producers can expect lower profits, according to two reports on the state of the natural gas industry.

A National Energy Board (NEB) report says a downturn in drilling will put a “significant dent” in supplies between this year and 2011.

Natural gas prices have declined from a high of US$13 per 1,000 cubic feet in July 2008 to below $2 per 1,000 cubic feet in September, which is encouraging many companies to curtail drilling activities. Indeed, the Canadian Association of Oilwell Drilling Contractors notes 205 rigs were active during the week of Sept. 22, compared to 428 at the same time in 2008. Prices need to be between $6 and $7 per gigajoule for a recovery in conventional natural gas drilling.

The NEB is expecting production from new and existing conventional natural gas wells, which delivers much of North America’s supply, to decline 17% by 2011 thanks to the recession’s impact on industrial consumption and an increase in unconventional supply from the US. Suncor Energy Inc., for example, will scale back its natural gas business by the end of 2010 to focus on its oil sands operations in northern Alberta. But Canadian demand is expected to increase 6% between now and 2011, with the biggest increase coming from Alberta oil sands developers who use natural gas to generate power and create steam used in the extraction process.

Unconventional activity in harder-to-access tight gas and shale gas reservoirs in northeastern BC, Quebec and the Atlantic region will continue at modest levels into next year as the industry improves drilling and fracturing technology. If pending pipeline projects are approved and developed, the NEB says activity in northeastern BC will increase.

Producers’ profits will tumble this year to their lowest level in a decade, according to a Conference Board of Canada industrial outlook report.

The Ottawa-based research firm said the gas industry’s overall profits will total just $2.3 billion this year, down 60% from last year, but their bottom lines should pick up in 2010 as prices improve.

The report says output by Canadian gas producers will be down 5% from last year’s level, which was 5.2% below 2007’s output. Lower materials costs will drive down total costs by 13% this year but the reprieve will be short as natural gas producers and oil sands developers compete for the same labour and materials.

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