Don’t expect the price of oil to rebound anytime soon, an energy expert told the Economics Society of Calgary at an October 13 event.
“Our outlook is that the market will continue to be challenged this year ... and even into next year, likely as far our as the end of next year,” said Jackie Forrest, vice-president of energy research at ARC Financial Corp.
Regarding United States shale oil production, which raised overall U.S. domestic oil output to a four-decade high, Forrest said: “Tight oil is not slowing down enough yet for us to say it will slow down.”
Even if tight oil output declines next year, it could be offset by a ramp-up in Iranian production when international sanctions are lifted.
Forrest said U.S. Energy Information Administration reports “assume we stay pretty imbalanced right through the end of 2016. And then we’ve still got a lot of inventory.”
However, she cautioned: “There’s a lot of assumptions that go into these sorts of outlooks and there’s many events that can unfold differently than the consensus view, which [is] that to the middle to the end of next year we start to see the markets get better.
“For instance, people are assuming Iran only adds a half million barrels a day next year. Well, we don’t know. They were producing more than a million barrels before the sanctions, so it’s possible they could produce more. It’s also possible they could produce a lot less.”
And Libya, she added, is a wild card: “If the civil wars were to get resolved, you could see a lot of supply come on that people aren’t accounting for right now.”
Demand could also be a wild card, Forrest said, noting this year’s global oil demand growth is expected to be roughly two and a half times last year’s growth.
No Plan B for gas
As for Western Canada’s natural gas industry, the ARC Financial executive said the only hope for growth is LNG exports. Unlike oil, which can be railed to seaports if pipelines to tidewater aren’t built, liquefaction is the only way to get Canadian gas to overseas markets.
“With natural gas there is no Plan B,” she stressed. “There is no option. The industry either becomes smaller or we get LNG.”
In Canada, the drop in production of uneconomic conventional gas has been offset by the increase in output from resource plays in tight-rock such as the Montney which can compete with low-cost U.S. shale gas on its home turf.
But Forrest warned that even low-cost Canadian plays will find it increasingly hard to compete in Canada’s only gas export market because of the enormous U.S. shale gas resource, which continues to grow.
Production from the Marcellus and Utica shales in the U.S. Northeast now stands at about 19 bcf a day compared with almost nothing about five years ago. And while most of that is from the Marcellus, she said the Utica has added about a bcf a day.
Until recently, there hadn’t been much production from the Utica because it wasn’t seen as a good source of natural gas liquids, which bolstered Marcellus economics while oil prices were high. But when oil prices plunged, so did NGL prices.
The loss of the NGL economic incentive, coupled with inadequate pipeline capacity, made the Marcellus less attractive, Forrest suggested, and this had led to a “surge of investment” in the Utica.
“And they’re finding IP [initial production] rates, when they apply the latest new technology to these dry gas areas, [are about] three times the IP rates here in some of our best wells,” she said. “And so dry gas can actually even make sense potentially at these low prices. So we wouldn’t have thought that even a year ago.”
She noted a study released in July estimated the Utica now has 782 tcf of recoverable gas resource.
“That’s like 30 years of supply at current consumption rates in the United States,” Forrest said. “So they already have like 100 years of supply potentially with the shale gas resource from the other gas resources in the United States. And now ... there’s another 30 years potentially in the Utica.”
She said production is also increasing from another vast store of dry gas.
“There’s also been a lot of breakthroughs in the Haynesville as well recently, which is a gas play people viewed as being not economic, and suddenly the technology started to work better there, [so we’re getting] more gas from that area as well.”
Surging shale gas production has kept North American gas prices depressed since the global financial crash of late 2008 and has driven down Canadian exports to the U.S.
This year the Canadian gas industry will be lucky to generate $15 billion in revenue, compared to $50 billion 10 years ago, Forrest said.
Gas growth
Nonetheless, growth in low-cost Canadian resource plays in northwest Alberta and northeast British Columbia has generated significant economic spinoff.
Forrest said the population of Grande Prairie in northwest Alberta has grown by about 25 per cent in the past four years, thanks to increased investment in tight-rock gas plays. “If you visit the region, it seems like equipment yards [line] every highway.
“I think a lot of policymakers don’t understand what happened.... Believe it or not, if you go back to 2009 and you compare the growth of [unconventional western Canadian] gas on a barrel-of-energy-equivalent basis, it’s grown as much as the oilsands,” she said.
The ARC Financial vice-president said there is little public awareness of how much Western Canada’s unconventional gas sector grew because the region’s overall gas output has fallen, and also because the tight-gas sector doesn’t have “the big press release like you do with the oilsands where a company announces a $2 billion or $3 billion investment.”
Displaying a photo of a Dawson Creek area equipment yard, she added: “These are lining the highways for miles near these communities. They didn’t exist four years ago.”
Forrest said rail terminals are being built because there aren’t enough pipelines to ship all the liquids being produced with the gas, while frac sand terminals “have been popping up everywhere. Every time I go into the region there’s new ones. There’s no more wheat elevators up there, it’s all frac sand terminals.”
But as U.S. domestic gas production continues to swell, Canadian gas will find it increasingly hard to compete in traditional markets such as the Chicago area, Forrest warned.
“The challenge is if we really want to grow this industry, we need LNG.”
