The Shale Gas Revolution

“We discovered we’re getting five times the reserves and five times the production for two or two and a half times the cost,” says David Carey, senior vice-president, capital markets. In other words, it proved much more cost-effective than anticipated and at the same time boosted the proved plus probable reserves to 416 billion cubic feet, which Carey describes as “far and away the largest and most important gas property that we own.”

Carey is quick to point out that Arc’s Dawson wells come with a rapid decline rate: a hole producing five million cubic feet a day at the start might only produce two million a year later. Nonetheless, the sheer volume of reserves that have been opened up in shale and similar plays will temper natural gas prices for years to come, he predicts. “It puts a ceiling on North American prices. If North American gas gets above US$7 or $8, there’s a huge amount of gas that can be brought on stream in the continental United States.”

A report produced by Calgary-based Tristone Capital Inc. in October summarized the impact of this “shale gas revolution.” The report noted how shale discoveries have effectively doubled the recoverable gas reserves already within reach of pipelines in the United States and Canada. “Our risked marketable resource potential from the nine shale plays of 261 Tcf [trillion cubic feet] is nearly equal to the year-end 2007 proved gas reserves in North America of 269 Tcf,” the Tristone analysts wrote. To put it another way, the new shale gas supply is more than 10 times the continent’s consumption in a good year. And that’s not counting embryonic shale plays (including the Mannville in north-central Alberta) that have not been proven on a commercial scale.

The effects of this supply increase will reach far and wide. Within the oil and gas industry itself, “Over the next several years we believe North American shale plays will be the main focus of E&P [exploration and production] companies,” the report says. The number of wells drilled in Canada’s three established plays – the Montney, Horn River and Utica in Quebec – should double this year over last to 800. Despite the industry’s low utilization overall, that will keep the latest-model horizontal drilling rigs and pressure pumps and the companies that operate them (Calfrac Well Services, Trican Well Service, Phoenix Technology Income Fund) busy.

Though Alberta-based companies dominate the action in Canada, the shale explosion will actually draw capital and activity away from the province. Tristone singled out the Horseshoe Canyon coalbed methane play as one that will likely lose out to the higher returns to be found in B.C.’s shale. Canadian gas exports to the U.S. should fall, both because of increased gas demand for oilsands in situ production and upgrading and greater gas self-sufficiency in the lower 48.

But the biggest casualty, at least in the short term, will be LNG imports. Last year LNG imports to the U.S. dropped to a billion cubic feet a day, down from a high of three billion a year earlier. The Tristone report predicts the emergence of shale gas supply will delay the need for large-scale imports by at least five years.

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