Many studies have been released that question the ability of North American natural gas supply to keep up with growing demand. According to Baker Hughes, the number of rigs drilling for natural gas continues to hit all time highs, however, production output has peaked in 2001 and has come down since then. Production in the US is now close to 1993 levels, when drilling was half what it is today.
North American natural gas supply comes from three major areas: the Western Canadian Sedimentary Basin (WCSB) which is located primarily in Alberta, the Mid-continent (central and mid-western US), and the Gulf of Mexico region. Unlike crude oil, natural gas production in North America is nearly sufficient to satisfy demand without having to rely heavily on imports. However, many organisations, such as the National Energy Board, demonstrate the necessity of important increases in imports to meet future North American demand.
As more and more wells are drawing from smaller and less productive pools, conventional production is dropping and the industry is moving towards developing unconventional sources of natural gas, such as coal bed methane.
On average, new wells in the US lose 32% of their production output per year, whereas this depreciation was closer to 17% in the early 1990’s. Therefore, producers must find an additional 32% of new supply each year simply to maintain current output before hoping to increase overall output. . In order to do this, producers must increase already high drilling activity in traditional basins, and explore distant untapped resources, such as Alaska and the McKenzie Delta region near the North Pole, that are considerably more expensive and not economically viable at lower price levels.
Estimates by the Canadian Association of Petroleum Producers also show reduced drilling activity in 2007 due to higher costs and low prices. They estimate that the cost of finding and developing a new well in the Western Canadian Sedimentary Basin has increased 40% relative to 2006 and 125% since the year 2000.
Click to enlarge the pictureUnfortunately, this decreasing supply situation is not something that can be reversed or even stabilized when only considering the “traditional” basins being exploited in North America. This is why long-term solutions have been evaluated and proposed. The most popular are the Northern development projects in Alaska and the Mackenzie delta region. However, these projects are costly and face environmental and regulatory hurdles that may delay their implementation to well beyond 2010.
The import capacity of liquefied natural gas (LNG) terminals via tankers from Trinidad, Egypt, Algeria or other Middle Eastern and African countries is on the rise and is expected to be a major source of incremental supply in the coming years. In 2006, global LNG supply was over 7000 Bcf, slightly above Canada’s total natural gas production. North America imported roughly 600 Bcf or 8.6% of worldwide LNG. However, this 600 Bcf represented just 2% of North American natural gas demand. The Canadian Gas Association estimates that 10% of North American demand could be supplied by LNG’s by 2020, market conditions permitting.
The weekly North American storage numbers are a major indicator of the short-term supply situation and drive natural gas prices to a great extent. Each week, the EIA (EIA) Energy Information Administration releases their estimate of the amount of injections into or withdrawals from storage. These storage estimates are often indicators of short-term fundamentals (production, demand, transportation, etc), which explain traders’ strong reaction to their publication.
Storage takes place either in depleted gas reservoir or other porous rock formations and are mainly located in northern US. Their locations are often close to consumption areas, which make them readily accessible to meet short-term surges in demand. In the summer, more gas is produced than is needed so gas is injected into storage. In the winter, gas demand is higher than supply and the difference needed is withdrawn from storage.
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Last modified on: 2009-08-06
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