An Alberta Gas Supply Response Model: Predicting Future Discoveries
Authors: Winter C.R. , Craig B.A. 
Published: March 2010

Introduction

Supply forecasting of natural gas has become one of the Canadian gas industry"s major problems. The ability to satisfy future domestic natural gas demand and to access export markets depends on forecasts of future reserves and deliver ability. These depend not only on the size of the resource base, but also on the rate at which resources are converted to reserves through successful exploratory drilling. Exploratory activity in turn is almost totally dominated by producer economics.

This study attempts to synthesize the historic performance of the industry in Alberta using statistical techniques to identify the most important variables governing the generation of new gas reserves for the 1957–1977 period. By far the most significant variable found was the "PV factor"- a measure of the present value of gas in the ground in the average discovery made from time to time within each of nine Alberta gas supply areas. The PV factor simultaneously reflects costs, netbacks, success ratios and market lead times from the producer explorer viewpoint.

An econometric model is proposed which exhibits excellent efficiency in matching historic reserves additions. The model lends itself to forecasting future reserves additions in Alberta making use of projections of netback prices," costs, success ratios and other variables.

Background

The nature of the natural gas industry is such that long-term forecasts of almost every aspect of the business are mandatory. Large investment in plant pipeline and distribution facilities requires the spreading of costs over two decades or- more in order to achieve reasonable unit cost levels. Project approvals from government regulatory agencies along with long-term financing arrangements can only be satisfactorily completed if adequate supply can be guaranteed with reasonable assurance for a like period of time. Appropriate energy policy can only be formulated by governments in possession of accurate forecasts of total gas reserves and supply.

The strategic importance of natural gas as an energy source the involvement of municipal governments and the reliance of consumers on gas as a household fuel leads to regulation of the industry along public utility lines. However, the drilling of exploratory wells and the finding of new reserves is dominated by free enterprise, risk-taking and the profit incentive. It is characterized by the spending of billions of dollars on drilling dry holes in the ground-an industry that somehow seems beyond the ken of governments. Perhaps never have these differences been more clearly demonstrated than in the current federal-provincial energy controversy in Canada.

The dramatic fluctuations in Canada"s natural gas industry over the past couple of decades are familiar to most of us:Prior to 1957, natural gas was produced in Western Canada for local utility use only; Alberta production was in the range of 300–400 MMCFD; natural gas was regarded as a by-product of oil exploration and production and priced accordingly at 10¢ per MCF or less. (See Figure 1 for historic gas prices.)From 1957 to 1973, the industry was characterized by high rates of-growth and a rapid buildup in reserves and production capability as sales increased in Eastern Canada and-the export markets through three major pipeline systems.