Rocketing gas prices may hinder oilsands growth - Highest in two years: Declining reserves, Kyoto, competition threaten industry
www.nationalpost.com Tony Seskus Financial Post Friday, February 21, 2003
CALGARY - Soaring natural gas prices and shrinking conventional gas reserves threaten to stunt growth plans in Alberta's energy-rich oilsands, a leading economist said yesterday.
Carol Crowfoot, president of GLJ Energy Publications Inc., said record prices for natural gas -- used in the extraction and refining of the tar-like bitumen -- are boosting input costs while conventional gas production is flat or declining.
The challenges add to the costs already confronting oilsands projects and means producers need to find new gas to maintain oilsands growth as well as develop new technologies to cut their reliance on natural gas, she said.
It also comes at a time when Canada's reliance on the oilsands production continues to grow, with production of synthetic crude expected to soon eclipse conventional production in Alberta.
"If the price of natural gas was the only risk factor, then obviously it wouldn't have much of an impact," Ms. Crowfoot said at a Canadian Institute oilsands conference in Calgary.
"Unfortunately, it's a cumulative effect of all of the risk factors -- the regulatory regime, the costs of Kyoto, competing with Venezuela, upgraders -- we need to go through that whole chain."
She added: "We do need to find additional sources of supply."
Natural gas futures yesterday rose for the fourth straight session, gaining 0.5% to their highest levels in more than two years after supplies of the fuel last week fell more than analyst' forecasts. Gas for March delivery rose US2.8¢ to US$6.16 per million British thermal units on the New York Mercantile Exchange, the highest close since Feb. 9, 2001.
April gas closed 1.2% higher at US$5.98, a contract high, after reaching US$6.01.
A bitterly cold winter in the U.S. put the squeeze on tight natural gas supplies, which has kept prices at high levels for months.
That's bad news for most oilsands developers, who must fight to reduce costs in a business with notoriously tight margins.
Natural gas prices are a particularly important cost component because the fuel is used in many facets of oilsands operations, though to a lesser degree in oilsands mining. The most significant user of natural gas are SAGD operations (steam-assisted gravity drainage technology), which uses the gas to produce the steam needed to warm the reservoir before extracting the tar-like bitumen from the earth.
The oilsands have been identified as a key growth area for Canadian energy supplies. The region surrounding Fort McMurray contains 315 billion barrels of recoverable oilsands reserves, rivalling those found in Saudi Arabia.
But Ms. Crowfoot cautioned that when gas prices reach levels around US$6 or US$7 per thousand cubic feet, oilsands growth plans are put "at risk" because they add to the development cost.
She also noted that with such high prices there is also concern of an opportunity cost lost because a high-quality, high-value resource is being used to develop a lower-quality product.
She said producers need to develop new technologies and fuel alternatives to reduce their dependency on natural gas.
Ms. Crowfoot said it is important that new gas reserves are brought on stream in order to meet the needs of the oilsands. She said gas production in Canada has been flat for the last two to three years.
"I think the industry is starting to realize that in order to grow production, not just stay flat but grow to meet the incremental demands for the oilsands, we have to get another source of supply," she said. "We need to replace about 3.5 [billion cubic feet] a day just to offset the declines."
She said that while tight gas supplies and high prices threaten to have a short-term effect, that she is "completely optimistic" that the oilsands projects will be viable through technological advances.