Thursday, September 10, 2009

EnCana Will Not Develop Promising Natural Gas Field Because of Glut


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Company won't develop third-largest field until demand recovers and that will take a major market shift
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Shawn McCarthy
Ottawa — Globe and Mail Update Last updated on Thursday, Sep. 10, 2009 03:33AM EDT
EnCana Corp. (ECA-T57.840.861.51%) is touting the Horn River shale deposits in British Columbia as the continent's third-largest natural gas field, but needs a fundamental market shift to make it commercially attractive.
EnCana's dilemma is reflected across North America – natural gas companies are bullish on new sources of shale gas, but that very prospect of new production is driving down prices to the point where development is uneconomic.
With North America's glut of gas showing no signs of abating, producers need a structural change in the energy markets – with more demand from new natural-gas-fired power plants and the broad adoption of natural gas vehicles – to boost the long-term demand for their fuel.
Even with depressed prices, the national gas industry likely faces a long wait for demand to rebound to its pre-recession level, let alone grow significantly beyond that. And so producers are faced with the unhappy prospect of being forced to slash production in order to prop up prices.
At an investment conference in New York Wednesday, EnCana executive vice-president Mike Graham said drilling results in the remote northeastern corner of the province suggest the Horn River basin could hold as much as 500 trillion cubic feet of gas in place.
Further confirmation of the Horn River potential is a boon for B.C., which stands to reap economic benefits from further development and eventual production from the basin.
But at current gas prices, Calgary-based EnCana – North America's largest gas producer – would be unlikely to develop its Horn River properties. The company says Horn River needs prices of at least $6 for 1,000 cubic feet to be commercial. On the New York Mercantile Exchange Wednesday, natural gas for delivery in October closed at $2.84 (U.S.) per mcf.
EnCana expects the market to eventually recover to the point where it can tap the high-cost Horn River field, which requires expensive pipelines to get the gas to market.
“You have this great success in bringing on more supply [across North America] and that came to the fore just as the economy turns and so demand dropped off,” EnCana spokesman Alan Boras said.
“Over time, we would anticipate that prices will recover … to a level where we believe we can bring on these new supplies.”
One sign of the glut: Storage facilities in the United States are virtually full. Analysts warn that, without dramatic production cuts this fall, gas prices will plunge even further once producers can no longer inject gas into storage.
Typically, a bust in the natural gas market would carry the seeds of its own recovery: Low prices force companies to slash drilling and shut in production, but also encourage consumers to use more gas.
That rebalancing could take years, especially if North America experiences another relatively mild winter.
“We will probably have a situation where – for the next five or six years – we will have abundant supplies of natural gas,” said Mary Novak, energy economist with IHS Global Insight Inc.
However, conventional production in both the U.S. and Canada is expected to decline rapidly in the coming years, due to low prices and the maturing gas fields. So, eventually, the market will tighten again.
“It's not like we're going to be awash in natural gas for the next 30 years.”
In a forecast released Wednesday, the U.S. Energy Information Administration said U.S. gas production – which climbed sharply in 2008 – rose another 0.9 per cent in 2009 but should fall by 3.5 per cent next year as a result of a 45-per-cent drop in drill rig activity since the start of the year.
In Canada, companies have begun shutting in wells as prices have fallen below levels where production is profitable, says Martin King, an analyst with First Energy Capital in Calgary.
He estimates that as much as one billion cubic feet per day of Canadian production will be taken off the market this fall, and those cuts should be enough to stem the price slide.
On the demand side, the IEA forecast that U.S. natural gas consumption will decline by 2.4 per cent this year and remain flat next year.
One bright spot: While power generation was off 4.5 per cent for the first half of the year, natural gas consumption in the power sector actually grew by 3 per cent.
However, demand in the U.S. power sector should actually decline over the next few years as new coal-fired plants come on stream, said Amber McCullagh, a Houston-based gas market analyst with Wood Mackenzie.
While some fuel switching occurred in the power sector, residential, commercial and industrial consumers are less able to respond to low gas prices, and the industry expects little growth from those markets beyond a normal rebound from recession.
One key unknown: To what degree will government policy encourage power utilities and transportation networks to use natural gas as a low-carbon fuel?
The industry in both Canada and the U.S. insists that natural gas is an attractive alternative to coal in the power sector and to oil in transportation.
But governments so far have focused their attention on renewables and conservation, and on electric cars and gasoline-electric hybrids.
“We think of natural gas as part of the low-carbon solution and not an impediment,” said Chris McGill, managing director of policy analysts, for the American Gas Association in Washington.
“We're not waiting for any huge technological advance or draconian measure … and we believe we can meet market requirements with a domestic, secure, North American supply, to be sure.”

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Paul Bowler

9/10/2009 6:17:07 AM
There is a math problem in the report! I have just checked the NYMEX MG contract - the price quoted (currently $2.89)is for 10000 million BTU, which is approximately 10 million cubic feet (10 mcf) of NG. So, if the NYMEX price is $2.89 per 10mcf, what chance does Encana have of getting $6 per 1000 cubic feet (20,000 times the NYMEX price!) to make the operations viable? Bring back sub-editors!

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westslope

9/10/2009 2:13:59 AM
Nothing wrong with leaving it in the ground.Get-rich-quick usually means leaving a few dollars in the ground.

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scotsdoc

9/9/2009 11:46:12 PM
I see we still have atomic power advocates around.....60 years ago I was one, in my innocence.....and even handled a bar of uranium metal.....rather like bronze and very heavy..........Atomic power was sold back then on the prospect of UNLIMITED CHEAP ELECTRICITY that would be delivered 'FREE' and unmetered like water..........Who would not fall for that prospect at the age of 17?Of course as we see now, (1) Atomic power did not live up to it's promise(2) It was unreliable, and seldom produced to specification (3) construction cost over runs were the norm. (4) Human error lead to near catastrophic episodes in the USA and USSR(5)no super annuated reactor site anywhere has been returned to green field status(regardless of expense) and finally (6) there is as yet no secure safe repository for radioactive waste.CANADA SHOULD FORGET ATOMIC ENERGY....LET OTHER COUNTRIES TAKE THE RISKS!Natural gas is an excellent fuel but also a feedstock for synthetic gasoline using the SASSOL technology and a feedstock for methanol the building block of many organic compounds.Canada is blessed with a super-abundance of gas(for which I am happy, being a shareholder of Encana) and this will support our Canadian economy for many years ahead..........The low prices today will certainly not impede demand from Industry or Home Owners who use it for heating.

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Counterinte​l

9/9/2009 11:06:16 PM
Is this peak gas yet ........LMAO .....

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Dick Garneau

9/9/2009 9:48:27 PM
Fusion is the future not fission. We need more research into this future fuel.Alberta and California is involved in research but not enough.

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EnCana Corp. (ECA-T)

57.84 0.86 1.51%
As of Wed Sep 09, 2009 4:43 PM
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