The Changing Nature of Alberta Natural Gas Production

November 2009

• Alberta is the primary source of Canada's natural gas output but since the first half of this decade, the province's mainly conventional production has been declining.
• This decline has provided incentive for producers to develop new methods to extract natural gas in areas which are inaccessible or unprofitable using traditional vertical drilling techniques.
• These new techniques have opened up possibilities for provinces other than Alberta to contribute to natural gas production in Canada, with British Columbia standing to gain markedly.

Over the last year, much of the talk about natural gas has focused on the reasons for the collapse in prices, a supply-demand imbalance made worse by the recession which has led to reduced industrial demand, and the emergence of cost-effective production from unconventional sources of gas. However, all of this discussion seems to have distracted end users from understanding what is happening in Canada's natural gas industry.

Alberta is the primary source of Canada's natural gas output but since the first half of this decade, production has been declining. Alberta's production is mainly "conventional", meaning that it relies heavily on traditional vertical drilling techniques in the Western Canadian Sedimentary Basin.

As is typically the pattern with non-renewable resources, the amount of extractable natural gas using conventional techniques has fallen forcing producers to drill more wells looking for diminishing supplies of natural gas. This decline has also provided incentive for producers to develop new methods to extract natural gas in areas which are inaccessible or unprofitable using traditional vertical drilling techniques. The development of non-vertical rigs (directional or horizontal drilling) and hydraulic fracturing is the result.

These new techniques have opened up possibilities for provinces other than Alberta to contribute to natural gas production in Canada. British Columbia stands to gain markedly from the new technology as most of its natural gas deposits are economically realizable using horizontal drilling technology. Saskatchewan, Québec, and the Maritimes also have deposits of unconventional natural gas, and they too may become part of the supply mix, albeit on a smaller scale than British Columbia.

When faced with declining intra-provincial production and potential growth in competition from outside Alberta, it is expected that pipelines will be transporting less gas out of the province to other parts of the country, at least in the short-term. Another exacerbating factor in the recent growth of unused capacity on pipelines from Alberta is the growth in natural gas consumption by firms extracting crude oil from Alberta's oil sands.

Since 2007, the flow on the western section of the mainline of TransCanada PipeLines has fallen over one billion cubic feet per day. In the short-run, the decline in throughput is expected to lead to higher pipeline tolls as operating costs, a significant portion of which are fixed costs, are divided over fewer gas volumes.

The possibility of a long-term reversal in declining throughput from Alberta could come from one of Alberta's competitors. Unconventional natural gas from British Columbia would most likely use the TransCanada mainline to reach markets in Central and Eastern Canada. However, it remains to be seen whether this will be sufficient to counter the loss in throughput caused by the depletion of conventional natural gas resources in the Alberta portion of the Western Canadian Sedimentary Basin and oil sands development.

For the present, existing shippers on the TransCanada mainline system should not be surprised by the prospect of rising tolls as Alberta's natural gas industry grapples with changes in its structure and the effects of economic recession.

Decline in Drilling and Demand Recovery: How Will They Impact Prices? Read more »