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Harvey Klingensmith felt his company was sitting on something big last year. Unfortunately, his chairman thought he was insane. Klingensmith operates a small, privately held oil and gas outfit in Calgary called Stone Mountain Resources that had originally focused on conventional gas but, like many of its peers, had switched to looking for unconventional types.
The company had drilled two test wells in the Horn River Basin in northeastern British Columbia, an area believed to contain huge reserves of natural gas. Klingensmith's results showed the site held a promising amount of shale gas. He proposed a multimillion-dollar plan to build more wells, pipelines and a gas-handling facility.
Stone Mountain's chairman balked at the idea of spending $150 million after drilling just two test wells (in fact, he swore at Klingensmith and called him nuts), but later changed his mind after they found a partner company to share the financing. This past summer, Stone Mountain turned on its first three production wells. "We're working our butts off, but we're really having a ball because it's such a unique opportunity," Klingensmith says of Horn River. "It's just about as good as you can get. God, there's a lot of gas in there."
Gas isn't abundant just at Horn River. Indeed, it's now clear that Canada has huge amounts of extractable natural gas, much more than was estimated a few years ago. Thanks to finds like Horn River, producers who were once worried about supply shortages are now drowning in the stuff. Canada is already an energy-rich nation — we rank third out of 30 OECD countries in terms of energy produced — but while oil may hog the headlines, our surplus of natural gas provides another important method of increasing Canada's role as an energy supplier in the future. However, the new-found abundance of natural gas has contributed to a steep drop in prices, and Canadian producers will need to develop new uses and export markets for the commodity in order to boost the industry's significance.
The big changes in natural gas supply have been driven by technology. In conventional fields, producers can drill a well and natural gas will rise to the surface. But those fields are maturing, pushing producers to look for unconventional sources, such as the shale gas in Horn River. The process is more complicated — the gas is trapped within shale rock that first needs to be burst open. But the results are plentiful. Horn River alone could contain between 350 trillion to 500 trillion cubic feet (tcf) of natural gas. How much is recoverable is not yet clear, but Horn River is just one of many unconventional fields: the Montney in British Columbia and Alberta and the Utica shale in Quebec are also gaining attention. There are huge reserves in the U.S., too. The Potential Gas Committee, a non-profit association of industry, government and geologists, estimated in June there are 1,836 tcf of gas in the country, an increase of nearly 40% over the estimates from two years ago.
But at the same time supply skyrocketed, the recession killed demand. Prices that flirted with more than US$12 per million British thermal units (BTU) last summer have now fallen below US$4. Producers need a price between US$6 and US$7 per million BTU to turn a profit, which is why the Conference Board of Canada estimates profits for the gas extraction industry will drop by more than 60% this year. Half as many drilling rigs were operational in Canada in September as compared to the same period last year, and the industry shed around 1,400 jobs between January and June.
The dramatic fall in prices has been a bit of a rude awakening, revealing just how much of the Canadian economy depends on natural gas. The Alberta government is projecting a $6.9-billion deficit for 2009–10, just over $2 billion more than originally estimated. The main cause? Weak natural gas prices.
"I don't know if the signs are there to suggest we're going to rebound to the heady days of early 2008," says Mike Dawson, president of the Canadian Society for Unconventional Gas. That's why the industry is starting to push policy-makers to drive demand for natural gas, mainly by promoting its use in electricity generation and as a transportation fuel. America's Natural Gas Alliance, an industry consortium, formed in March for this purpose. Calgary-based EnCana, which is spinning off its oil division and focusing on natural gas, is the only Canadian member at the moment, but a similar lobbying effort is underway north of the border.
Natural gas is considered the cleanest of fossil fuels, an argument the industry is employing to promote its use in electricity generation instead of coal. A typical coal-fired power plant will produce nearly twice as much carbon dioxide as one powered by natural gas. But coal, a cheap form of power generation, provides Canada with about 17% of its electricity needs, whereas natural gas accounts for only 5%. In addition to the environmental drawbacks of coal, the economics will look increasingly unattractive as carbon pricing comes into effect in Canada and the U.S. Carbon capture and storage, which the coal industry is promoting to improve its environmental standpoint, is still unproven on a commercial scale.
Likewise, technologies such as wind, solar and biomass power are not yet ready to deploy on a large scale, proponents of natural gas say, adding the commodity can act as a bridge fuel between coal and renewable sources to reduce emissions in the near term. And unlike a nuclear power plant, a natural gas facility can be built quickly, within two to three years. "Just like you diversify your investment portfolio, it makes sense to push for a diversified power solution," says Edward Kallio, manager of gas consulting at energy consultancy Ziff Energy Group in Calgary. Renewable power and natural gas can also complement one another. Wind and solar cannot produce electricity constantly, but a natural gas plant can be switched on and off much more quickly than a coal plant, helping to meet demand.
In addition to replacing coal, natural gas could also supplement some petroleum use in vehicles. Currently, cars and trucks that run on natural gas make up a small portion of the world's vehicles. Few manufacturers build vehicles that run on natural gas, and the infrastructure largely doesn't exist to support them. But some want that to change. "It's the greatest opportunity natural gas has to provide," says Eric Marsh, a vice-president at EnCana. He contends the price is less volatile than oil, and the technology is available today, unlike electric vehicles. It can also be easier on the environment than petroleum. The California Energy Commission found that using compressed natural gas reduced greenhouse-gas emissions by 30% in cars and 23% in buses, compared to gasoline and diesel.
Like burning natural gas for electricity, using it to power vehicles is still not ideal from an environmental standpoint, but it could reduce emissions sooner rather than later. Replacing fleets of trucks that currently run on diesel is a logical first step, proponents say, along with building natural gas refuelling stations along major transportation corridors.
Some analysts believe a rush toward natural gas vehicles is unlikely, at least before 2020, due to the large amount of infrastructure required. The price of natural gas is also going to be volatile over the coming years, which doesn't necessarily make it any better than gasoline for consumers. "We're going to have some real swings in supply and demand going forward," Kallio says.
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