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Canada's Secret Natural Gas Crisis

Written by Keith Kohl
Posted February 5, 2007

Baltimore, MD-Peak gas will become a major problem over the next decade. Canada's natural gas industry is in jeopardy. And with the U.S. being so dependent on Canadian gas, this puts our economy at risk from the resulting shortfalls.

The North American natural gas market hinges on Canada, which exports half its gas production to the United States. In turn, the U.S. supplies Mexico with over 17% of its demand.

And Canadian gas exports have grown immensely. According to the Canadian Gas Association, they increased over 306% in the last twenty years.

So any slowdown in Canadian gas production would greatly affect its southern neighbors.

It Already Hit the Fan

In the Energy Information Agency's (EIA) International Energy Outlook (IEO) published last June, Canadian natural gas production is seen as declining steadily until 2025.

But that isn't the harrowing statistic.

Canadian reserves have been declining for decades. Their reserves of natural gas were estimated at 99.2 trillion cubic feet in 1985. That number fell to 56.3 trillion cubic feet in 2005. Canada has lost 43% of its proven reserves!

The largest deposit of natural gas is in the Western Canada Sedimentary Basin (WCSB). This area accounts for about 98% of Canada's gas production.

The Canadian Energy Board published a report assessing the WCSB five years ago. The data show that production from recent gas well connections has declined faster than older connections. Moreover, production from then current connections was declining by 20% per year. The report noted that production would have to increase by nearly three billion cubic feet per day to offset those decline rates.

The 20% decline rate is almost double the 13% decline rate reported in 1992.

And the picture gets even worse for Canada.

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The EIA's 2006 International Energy Outlook also projected that natural gas demand in Canada's industrial and electric power sectors will more than double by 2030.

Last year Canada consumed half of its production and exported the rest. Overall Canadian consumption is expected to grow an average of 1.9% annually until 2030. This means Canada will consume 85% of its production.

That will reduce exports to the U.S. by 35%!

Natural gas prices are also growing rapidly. The price in 1995 was $2.71 per million Btu(MMBtu). It soared past $13MMBtu during 2005, an extremely volatile year. Yet even when it stabilized in 2006 between $6 and $7, that was still 139% higher than the 1995 price.

Abandon Ship

And help is not coming from the major oil and gas companies.

Natural gas is quickly taking a back seat to Canadian oil sands. Many companies are slowing or even dropping exploration programs in 2007. One of the reasons is because of the higher profitability of oil projects.

In fact, nearly $100 billion dollars will be invested in the future of oil sands over the next decade.

The Domino Effect

As I mentioned before, the declining Canadian natural gas industry will significantly affect the rest of North America.

The U.S. will need to make up the lost gas imports from Canada, causing an increase in production from unconventional sources. This includes resources like tight sands, shale and coalbed methane.

Another stress point for the U.S. will be discovering new gas fields. Most of the conventional fields have been found. Developing any new fields will be costly.

Next down the chain is Mexico.

Mexican natural gas is underdeveloped despite significant reserves. The country's state-run oil and gas company owns exclusive rights to Mexico's oil and gas reserves.

And according to the EIA, Mexican gas consumption will rapidly grow over the next twenty years. They will need to double their imports by 2030 to meet demand.

The serious decline in Canadian natural gas supplies is going to severely affect the North American energy market. Strong development in liquefied natural gas will need to take place if it is expected to meet demand. Natural gas prices will continue to climb higher until the switchover to LNG takes place.

Until next time,

Keith Kohl

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