Canadian Producers Struggle to Boost Output

Despite an immense resource base, near-term Canadian natural gas output is expected to fall in the wake of the Covid-19 pandemic, before increasing more than 50% over the next two decades, according to data presented September 30 to NGW’s Canadian Gas Dialogues webinar series.

Dulles Wang, research director, natural gas at Wood Mackenzie, said he expects to see Canadian gas output decline slightly in 2020-21, from a present level of about 16bn ft³/d, before increasing to more than 25bn ft³/d by 2040 as the gas sector restructures in the face of flagging prices.

Any restructuring won’t be down to a lack of resources. According to Brad Hayes, president of Petrel Robertson Consulting, western Canada’s unconventional shale and tight gas deposits hold more than 100 years of gas supply at present output rates.

Hayes said Canada’s Montney and Duvernay formations – with marketable gas reserves of 449 trillion ft³ and 77 trillion ft³ respectively – have seen the lion’s share of attention and investment dollars in recent years. But “immense” resources also exist in Alberta’s Deep Basin, which has been producing since 1978 from an in-place resource of more than 500 trillion ft³.

“These are impressive resources…capable of much greater production rates” as new LNG projects come on stream later this decade, Hayes said.

That assessment was shared by Dan Allan, president of the Canadian Society for Unconventional Resources (CSUR), but omits existing and undiscovered resources further north in the Liard and Horn River basins, stranded by a lack of infrastructure. Those resources are largely so-called ‘dry gas’ which doesn’t contain the associated liquids producers use to offset costs and bolster their economic value proposition.

By contrast, the southern basins are all connected to infrastructure and offer immediate development opportunities in existing oil producing regions. However, the pace of that development depends on several factors, including future strip prices, drilling rates and capital expenditures.

As a general rule of thumb, Canadian producers have traditionally spent about twice their cash flows to replace declines and add new volumes.

But Darren Gee, CEO of Peyto Exploration & Development, said his company will be forced to live within its existing revenue streams this winter to hold production flat before resuming a moderate growth path as the new LNG Canada export terminal comes on stream starting in 2025. Peyto has drilled more than 1,000 gas wells in the past decade, making it Canada’s most active Deep Basin gas driller, along the way gaining a reputation as among the Basin’s lowest-cost producers.

Montney producer Birchcliff Energy will also have to live within its means, according to CEO Jeffery Tonken, who sees a looming cash crunch for over-leveraged producers in both Canada and the US. That’s why it’s important, he said, to maintain “pristine” balance sheets before pursuing new growth opportunities.

Birchcliff intends to spend just enough to sustain existing production and pay down debt to position itself for an inevitable upturn once inefficient operators are forced to sell assets or shut their doors.

According to Moody’s Investment Services, US producers are facing more than US$200bn of maturing debt over the next four years, including US$41bn this year alone. This has resulted in several high-profile bankruptcies, including shale gas stalwart Chesapeake Energy, which filed for Chapter 11 protection in June. In the US, 13 companies entered bankruptcy protection in April and May, the highest quarterly total in more than four years. The situation isn’t much different in Canada.

“High cost operators have real troubles,” Tonken said.

Further complicating a future recovery is the state of Canada’s battered service and supply sector, which Tonken said has been “decimated” by high costs and falling activity levels. Only those companies that own their processing infrastructure with access to rigs and manpower will be able to survive, he predicted.

Peyto’s Gee agreed that there aren’t many cost savings left to wring out of the companies that supply the rigs, fracking crews and pressure pumping needed to sustain a return to growth. “We’ve taken our pound of flesh,” he said. “We’re going to have to build out a brand-new services sector, and that can only be driven by higher commodity prices.”