Everything you ever wanted to know about natural gas

The Economist magazine has a spectacular special report this week on natural gas.  It covers everything from how the gas market works, to the new technologies used to extract gas to how gas is changing energy markets around the world.  There is also a full section on the risks associated with gas development including environmental concerns.

The NB government estimates this province has some 80 trillion cubic feet of shale gas.  Now most of us, including me, don’t have any idea how much that is but anything measured in the trillions seems large.

Canada’s total production in 2011 was estimated to be 3.75 trillion cubic feet so by that measure, there is enough gas under New Brunswick to supply the entire Canadian market (and substantial exports) for 21 years.  That’s a lot of gas.

We don’t know if it can be extracted.  We don’t know if there are markets for this gas.  We don’t know if we will be cut off as shale gas is developed widely elsewhere.    We do know we have the gas.

What do you do when you realize – in very short order – that you have a gold mine under your feet?

This is all wild speculation of course but take that 80 Tcf and multiply it by a conservative price of $4.00 per thousand cubic feet – and you get a revenue stream of $320 billion.  Spread that out over the next 60 years and that would equate to $5.3 billion in revenue per year (in today’s dollars and assuming $4.00 stays).  That, in turn, would translate into substantial tax revenues per year (through royalties and economic activity) and possibly several thousand good paying jobs direct, indirect and induced.

I don’t want to debate these numbers.  They could be wildly high or low – the estimated amount of gas is only based on what is known.

This is why I am frustrated that the environmental concerns over hydraulic fracturing have taken up 99 percent of the conversation.   I agree this is the most visceral issue and one that has been pounded by environmental groups, social media and the traditional media but there are other major concerns too such as markets for our gas.    Everyone is racing to attract natural gas investment – across Western Canada and more than a dozen U.S. states.  We have a large store of it but finding uses at an acceptable price (to buyers and producers) is critical.  Are there potential new uses for our gas?  We have substantial pipeline infrastructure and gas offshore Nova Scotia is likely to be dry within a decade or so.

If we don’t develop our own gas, we will have to bring it in from the US or from LNG – and other places get the economic benefit and we just pay the cost.

So let’s have the debate but I really hope we can expand it to include a broader set of issues.

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21 Responses to Everything you ever wanted to know about natural gas

  1. mikel says:

    Dude, the GOVERNMENT estimates!!! That is TOO funny. Then why is it that in the only partnership looking for gas tanked because tests showed hardly any gas?

    The Atlantica centre for energy says there are 112 billion cubic feet of natural gas reserves in the province, and currently about 7 billion cubic feet are extracted annually.

    Corridor Resources are the big boys in the industry, and of course you can’t find ANY numbers on royalties from the province, but you can from the company. So the banner year was 2008, when production peaked, and for some reason, its gone down since (seems strange when there are TRILLIONS of cf down there).

    In fact, a point was made that royalties to the province in that year was LESS than the stock value given to executives at Corridor that year. However, the province got $5 million in royalties from the $81 million that Corridor made.

    So those are the ‘facts’ as opposed to fantasy. Which may partly explain why the environmental aspect of it takes up so much print. To put it in perspective, the natural gas royalties the province got during its biggest year, was one thirteenth the amount that apartment building owners are going to be saving by not having to pay property tax to the province anymore. There will be 67 million dollars LESS going into the province because of that.

    In other words, that ONE public policy change would require that the province ship out its ENTIRE reserves in ONE YEAR in order to cover the amount that it is losing.

    THAT is why so much energy is spent on the environmental aspect of it. Optimism is one thing, but come on!

  2. anonymoose says:

    I read a bit, and will read more later.

    The Economist is famously well written but they’re hardly an unbiased source about any issue where there’s tension between the money guys and the environmental guys.

    What I don’t want to see is all that gas extracted pumped straight to Boston, with none of the benefits being felt here. Let’s develop some of those reserves ourselves and crank out cheap electricity for consumers and heavy industry.

  3. At 40 percent royalties, as suggested previously http://www.cbc.ca/news/canada/new-brunswick/story/2012/05/17/nb-shale-gas-regulations.html that’s 2.12 billion a year, and an end to the problems with the provincial debt in less than a decade.

    At 10 percent, also mentioned in the same source, that’s $530 million, clearly substantial, but not in the same debt-erasing territory.

    At 6 percent, the Corridor royalty, we’re at $318 million. At the 5 percent rate, which Alberta has for new oil or gas, we’re at $265 million, and not even erasing the 2011-12 deficit. http://www.gnb.ca/0160/budget/buddoc2012/index-e.asp

    So we need to understand: it’s a lot of money, but it’s not Alberta-level or even Newfoundland-level oil money. It would help, but it wouldn’t transform the province’s finances.

    More importantly (since I think the 5 percent number is the most reliable of the bunch, since it’s what the competition is actually charging) it puts an upper limit on the cost of damages to the province we would be willing to incur to receive this revenue.

    This is important: gas exploration will create costs for the province, everything from oversight to roads maintenance to environmental assessment to payments of damages to property owners.

    Revenue of $265 million should cover this with money to spare, which is why on balance I am in favour of shale gas exploration. But – still importantly – given these numbers, there’s no reason why a government and/or energy company could not promise prior to the first well that all costs incurred by landowners (eg., from polluted wells) will be fully compensated.

    That such promises have not been forthcoming fills me with deep suspicion, and it makes me question either (a) the rate of return the province will actually receive, or (b) the willingness of government and companies involves to address the environmental and human impact.

    These are deal-breakers. Without these guarantees, it would be irresponsible to support shale gas development in the province, as the costs may well exceed the returns.

    After all, if the price drops to $1.00 per thousand cubic feet, and if the royalty rate drops to 1 percent – neither outside the realm of possibility when considering the world-wide abundance of shale gas reserves http://www.eia.gov/analysis/studies/worldshalegas/ – then we are looking at annual revenues before expenses of $13.25 million. Barely enough to pay for Margaret-Ann Blaney.

    I think discussions of shale gas should be open to both the potential and the liability. If we as a province are to engage in such an endeavour, then we should be prepared to openly acknowledge the risk, and to have clear plans for mitigation and compensation should the best-case scenarios fail to materialize.

  4. mikel says:

    For those interested in royalty rates, supposedly they are going to be much more wonderful in the future, but here’s the past, at least at Corridor:

    2003: .53%
    04: 6.07
    05: 7.26
    06: 8.21
    07: 6.21
    08: 6.14
    09: 4.35

    Royalties paid:

    03: 4171
    04: 191000
    05: 321000
    06: 434000
    07: 2039000
    08: 5000000
    09: 1979000
    10: 606000

    Production (mcf-mcf actually means THOUSANDS, not millions for some reason)

    04: 331784
    05: 320888
    06: 307282
    07: 3716000
    08: 6765000
    09: 6196000
    10: 4819000

    I can’t validate this, but I read “Regulation 2001-66″ states “the royalty on natural gas shall be TEN PERCENT OF THE ACTUAL SELLING PRICE or “fair market value at the time and place of production, WHICHEVER IS THE GREATER, free and clear of any deductions”.

    So, in 2008, Corridor resources for NB were $81 million. So BY LAW the company SHOULD have paid $8 million, NOT the $5 million they actually paid, which was based on the price at production.

    Now, normally I would say “well, if the LAW says they have to pay X amount, then surely thats what happened”, but given some other things I’ve discovered, I’m really not surprised. This all goes back to the Bruce Fitch “gee I really didn’t understand the lumber industry two months ago but now thanks to Irving I do”. It’s a wonderful thing to look at government publications and think how wonderful things could be without pesky protestors, but to me, it seems hopelessly naive.

  5. Tony says:

    I just want to raise a point that I think many people are missing. How ethical is it to receive transfer payments from jurisdictions that have decided that extracting shale gas is acceptable (e.g. Alberta and Saskatchewan) while opposing to its extraction in NB? I just don’t think that it is fair and honest.

  6. Kate says:

    @ Tony…your comment has always be my view! …And if we REALLY hated gas/oil mining and refining, would we not start in our own homes and lives? ATVs, Snow Skidoos, HUGE trucks, none of which are necessarily used for anything but recreation. most NBers don’t really hate industry of this kind, nor are they really great caregivers of their province…the really thrust is “not in my backyard”!

  7. John Skelton says:

    If MikeI type opinions gain credibility NB will surely remain an economic backwater Confusing existing production with potential production shouldn’t be that hard to understand.

  8. John Percy says:

    Resource extraction will always bring some measure of economic benefit to a region, but the industry is dependent on market forces beyond its control and the resultant benefits can be a fickle mistress.

    The question is not, do we have enough gas, but at what price — what are the economic implications? What is the price at which gas is materially slowing down the wellbeing of populations? That’s the real question: when is gas extracting a rent that’s over and above its utility?

    In the US gas is $2.70 per MBtu, or Million British thermal units, and Exxon CEO Rex Tillerson says, “we’re losing our shirts at current prices.” That’s not news. Dry natural gas costs somewhere between $4 and $5 per MBtu to extract. A number of things are driving the price below that. There’s the recession and slow recovery. There’s the step function blast of supply, the fact that all this new natural gas came onto the market before industry and utilities could absorb it. People have these “drill or lose” leases, which they are drilling even though they’re losing.

    And the fact that oil prices are high means that if you’ve got a wet natural gas field, those liquids, (natural gas fields produce ethane, propane, and butane that can be separated out and sold to refineries or chemical plants as a feedstock), which are sold at very high oil-related prices, are in a sense subsidizing you to dump natural gas. There are weird economics going on, where the higher the oil price, the lower the gas price.

    Is that sustainable? No, of course not. We’ve got a gas price at the equivalent, on an energy-content basis, of something like $18 or $19 per barrel of oil. That huge difference between high oil prices and low gas prices can’t be maintained. Look at rig counts, which are coming down. Look at the gas futures prices. We are going to see gas prices going up.

    There is this sort of weird collective hysteria about gas. The US president said, “We may have 100 years of domestic gas in the U.S.” Everybody immediately translates that into 100 years at $2.70/MBtu. But that’s not right. Long-term, it needs to be at least $4 or $5 and probably more like $6 to give people a return on capital. And if you look at the “100 year” piece of that, it’s a fascinating number. As far as I can see, it refers to gas in the ground. Gas in the ground is nice, but we’re talking about cheap gas, under $6/MBtu. Onshore wind right now is competitive with gas at $6. If you want gas below $6, guess what, you haven’t got a 100 year supply, you’ve probably got more like 50 years.

    That’s still a long time. But then that’s 50 years at current extraction rates. What happens if you use the gas to displace coal, and then industry uses gas for its heat and power needs, and then certain transportation fleets use natural gas, and then export, for arbitrage opportunities … so hang on a second. If you double your use of gas in the economy, then suddenly 50 years becomes 25 years.

    So the reality is, it’s 25 years and it’s not $2.70. So maybe we should take a hard look at the NB assertion of enough gas to supply the entire Canadian market (and substantial exports) for 21 years in the same light.

    Does that mean the whole thing is a mirage? Of course not. It’s still displacing coal. It still means economic growth. It’s got a huge, huge footprint. It is going to have lower energy costs even if gas goes up to $6. It’s still a great thing to know you’ve got a load of gas.

    But it also means you’ve got the other 75 percent of the energy matrix to deal with. What will happen over the next 5 years is the pendulum will swing back. That gas will be absorbed; the prices will come back up. There might be some exports, but I’d be surprised if there’s that many people brave enough to build liquefaction trains — liquefaction, transport, and gasification costs $7. If you think the domestic cost might be $5 or $6, you better really believe that the international price is going to be $12 or $13 forever in order to earn a return on that.

    The other big piece is decline rate. Do we really understand what happens in year 8, 10, 12, 14 of a fracked field? The answer is: no, we don’t, because there aren’t any. A normal gas field is a few big years and then it goes flat, but it lives on at that steady rate. There’s some thinking that says that a fracked field will just be an exponential decline, with no flattening. Nobody really knows.

    The fact that nobody knows has not stopped governments and industry from touting all the wonderful potential benefits of gas extraction with numbers that are not necessarily accurate and questionable at best. And there are considerable environmental risks that cannot be dismissed, and those risks will have an economic impact, although human ingenuity has a way of reducing risks more often than not.

    All sides attempt to paint the best possible picture for their argument and the truth, as always, lies somewhere in the middle. It’s just that truth isn’t as sexy and doesn’t sell well.

  9. Mr. Percy, that is a thoughtful post. It’s rare these days for politicians to try and cool off a hot potato. It would be far easier for you to take a hard position on shale rather than the nuanced one that you have (at least as far as I can tell). I appreciate it.

  10. John Percy says:

    @David Campbell
    David, politics still plays the old perception is reality game with the public. The rules need changing. I often say that politics is a 19th century concept applying 20th century solutions to 21st century issues. Black and white cannot supply solutions to social and economic issues. The reality is always a series of shades of grey, as I discovered one morning looking into a mirror.

  11. mikel says:

    Actually John, NONE of that is MY ‘opinion’. The tables were straight from Corridor, and my other comments were basically the same as other people have made recently, including a gas engineer (or at least someone who claimed to be).

    In reality, NONE of this matters, because NO companies are even LOOKING for natural gas in New Brunswick because its not even economically viable. They’ve SAID so. So rumifications about how much there ‘may’ be are irrelevant. The difference between ‘existing’ and ‘potential ‘ ARE easy to understand. The ‘potential’ is the pie in the sky estimates given by the government that have NO evidence. If David or others want to believe them, thats their business. The Atlantica centre for Energy is of course a right wing think tank, but when they talk about how much is actually there, I’d tend to believe them over government officials. If you don’t, that’s ok by me.

    Heck,why believe that, there may actually be QUADRILLIONS of cf of gas, nobody knows, so why not believe that? While your believing that, why not believe that NB will actually get 10% royalties. They haven’t in the past, but since all we’re doing is buying the government’s line, why not? So it could be BETTER than Alberta, since NB has a smaller population. Every single New Brunswick COULD become a millionaire….if it weren’t for those darn protestors! Gee, hows that for an opinion that will keep NB from being an ‘economic backwater’.

    If you want to debate ‘facts’, then go ahead, but don’t waste people’s time with pointless diatribes against people who actually put some work into their posts. It wasn’t easy finding that information, because the government no longer even lists natural gas royalties seperately from some other types of royalties, so you can’t even compare. Now, if you want to trust a government that won’t even tell you up front how much money you’ve gotten in the past from a resource, well, that’s your business.

    But it ain’t the people pointing out that the emporer has no clothes that is making the province an economic backwater. In fact, the opposite is true, since we know that because of the protest the province has changed the royalty scheme so the province gets more, and individual landowners will get more, which means more money will stay in the province. From my limited knowledge of economics, more money IN the province is a GOOD thing, and if you DON”T want to be an economic backwater, then I would suggest a way to do that is to have more money in the province.

  12. Tony says:

    David, one thing that is also missing in the discussion is the employment benefits of drilling only. A reliable estimate from CAODC (Canadian Association of Oilwell Drilling Contractors) is that, on average, each rig employs around 125 people: 25 direct jobs, 50 indirect jobs for suppliers and services companies, and 50 additional jobs supported in the local economy (i.e. restaurants, hotel rooms for drilling crews, etc.).

  13. mikel says:

    Corridor is the big player in NB, they have 20 employees. There is more work in contracting, they used 270 contractors, but don’t say how long they were employed for. According to the province they were also underpaying their miserably low royalty rate, even sent them a notice of debt.

    Thanks to the lower gas price they have also cut back on production, which we can assume means fewer contractors-no word on whether they have laid anybody off. According to the above equation, there are 46 ‘rigs’ in operation, which SHOULD mean over a thousand jobs-but it doesn’t.

    As for ‘opinion’, let’s combine whats been said here about OTHER industries. Doesn’t anybody here think its odd that the New Brunswick government has no problem buying equity into a hit or miss company like Radian 6, yet DOESN”T buy an equity position in ANY of its own gas fields?

    There are supposedly ‘trillions’ of cf of gas. And unemployment in NB is at historic highs, particularly amongst young people. Plus, this industry actually has experience that is transferrable to other areas developing gas.

    Plus, NB pays exhorbitantly high prices for natural gas just because it offered a monopoly to Enbridge.

    The point I’m making here is, boy, wouldn’t it be great to have a nationalized gas industry. So that, as one guy said above, some of that gas would actually be developed in the province. So, if there are trillions of cf of gas, the province could provide employment while it needs to, by at least purchasing an equity stake in the fields (which wouldnt’ be hard since Apache already bailed). It would create jobs, and some of the gas could be used to develop other industries and heat homes in the province.

    Of course thats just an ‘opinion’.

  14. Rupert Penjab says:

    Why I am frustrated is that the pursuit of shale gas in New Brunswick is being sold to: by and large (and anyone stupid enough to believe) as the “cure-all” to what ails this province.

    It most definitely is not a “cure-all”, it will not employ any significant number of people, it will not stop our government(s) wasting money, and, most importantly: it will not put an end to corporate welfare.

    New Brunswick historically has been known for fishing, farming, and forests. We have given the fish and the forests away for nothing, and if you care to notice the farming is “on the rocks”.
    Shale gas is the same deal: something WE all own (let’s not forget that simple truth) that our government(s) are poised to give away for nothing, so that they can continue to waste our money by operating inefficiently and maintain the expected level of corporate welfare.

  15. mikel says:

    Just two final points then I’ll leave this alone. First, Rupert’s point is why I post on this, mind you, David IS just going with Corridor’s natural gas estimate. However, as pointed out before, its VERY possible that even with lots of natural gas companies could LOSE money, as Corridor did for several quarters.

    Also, I don’t know much about Corridor, but it seems to be a publicly traded company in Halifax. And as one of the only players, that can be VERY dangerous. People have seen share price manipulation on an epic scale recently, and its no surprise that Corridor’s share prices hit an all time high when that announcement of gas came out-and has been plummeting since.

    However, there ARE several papers on the economic effects and as I’ve said, it COULD be a ‘cure all’. It COULD be a boon, we simply don’t know. But at this point its all being left up to two or three companies. Like I said, it would make more sense to nationalize it, create jobs when the province needs it, and own the equity when gas prices increase or use the gas locally-since its still much cheaper than oil.

    Finally though, people shouldn’t OVERestimate the levels of ‘corporate welfare’ and ‘inefficiency’. THere’s no doubt they exist and can be substancial, but if you look closely, you’ll find that NB is positively MISERLY when it comes to writing cheques for public services. NB ranks at the lowest end of numerous public policy initiatives, and this inequality is mainly why I don’t see ANY industry as a ‘cure all’. I’m pretty sure it was right here at David’s blog a few days ago when he posted employment statistics, and I’m pretty sure I saw that in Alberta, there is still 10% unemployment for the 15-24 sector. And Alberta is about ‘as good as it gets’. So this country has HUGE structural problems which are only going to get worse, and NO industry is going to change that simply because they aren’t charities (tho Corridor does say they’ve given $80 grand to Sussex charities).

    Anybody that thinks oil or gas solves their problems need only look at Africa, where they CAUSE more problems than they solve.

  16. Richard Reeleder says:

    “This is why I am frustrated that the environmental concerns over hydraulic fracturing have taken up 99 percent of the conversation.”

    The opposition to gas extraction is partly from those who simply will not welcome any change (since they are content with things as they are) and partly from those who might support development if they thought thought there was a net benefit. At the moment they are dubious re the benefit.

    The latter could be convinced to support extraction if there was a reasonable royalty regime in place and sufficient regulation. Unfortunately, GNB is talking but not doing much in either regard. Many have watched the Penobsquis episode as an example of a government letting people twist in the wind rather than acting on their behalf. If GNB had taken quicker action to mitigate the adverse impacts of mining on water supplies in that area, then perhaps there would be trust capital than GNB could now exploit. Instead we have the opposite. GNB needs to show, as you stated several months ago, that the govt has the people’s back. That is not the case right now.

    Given current economic conditions we are probably a decade away from much in the way of gas extraction. IMHO we should use that time to put a tough regulatory / compensation system in place. GNB should stop pretending that adverse impacts will not occur, and have a transparent mechanism in place to compensate those affected – a mechanism that does not require fault-finding lawsuits. If that were in place, I believe that a significant part of the opposition would support extraction.

    NB’s economic situation, if it continues to erode, will demand that the gas be extracted when it becomes economical to do so. We should be preparing for that eventuality, not pretending that extraction can be stopped forever.

  17. anonymoose says:

    > those who might support development if they thought thought
    > there was a net benefit. At the moment they are dubious re
    > the benefit.

    Bingo, that’s my position exactly. I see us extracting and exporting all our gas at rock bottom prices with little benefit to us, our own little Churchill Falls boondoggle.

    The only good thing about all this dawdling is that the price can’t go any lower, if it takes us 10 years to get serious hopefully the price will increase.

  18. anonymoose says:

    While I’m babbling, has anyone done the numbers on what it would cost to form “NB Gas”? Pick a field, develop it, and sell the gas to NB Power at a small margin. NB Power builds a gas generation plant (which are relatively cheap as I understand it) and uses that cheap gas to help lower rates while paying down their debt.

    I expect a bunch of “the gov’t couldn’t possibly be smart enough to pull this off” comments. Just remember that in the oil & gas sector most of the work is done by subcontractors anyway.

    Here’s another idea. The arguments about the environmental impacts seem to have an anecdotal flavour, Why not take a big chunk of Crown land in the middle of nowhere and run a nice 10 year study? It’s going to take that long to make a decision anyway, might as well be doing something in that time.

    Make it a serious study, get input from the gas industry and also the frigging Suzuki Institute or Greanpeace or whoever, do a serious scientific meticulous longterm study. Should be able to get someone else to pay for it even.

  19. Sent to me by email this morning:

    ● An independent study commissioned by Corridor puts
    best estimate of shale gas resource contained in Frederick Brook formation in the Sussex/Elgin sub-basins (SE
    NB) at 67.3T ft3 gross .This is said to be equivalent to proven reserves in western CDA. The discovery was made
    when Corridor drilled a Green Road (G41) well that it
    deemed non-productive. NB’s shale resource is chemically
    unique in North America, presenting some challenges &
    requiring new techniques to develop the resource. (Release,
    09/6/29)

  20. mikel says:

    Ok, well, I can’t pass that one up.
    First, ‘independant’ testing is about as valuable as in house testing. Apache AND Southwestern both bailed on the biggest gas find in Canada? Corridor STILL can’t find a partner, now, why wouldn’t another company at least want to keep its finger in the pie? They conducted NEWER tests which said something quite different. Go read OTHER press releases from 2009, they all talk about how important it is to get into NB first, because in the US its already too competitive. But for some reason, getting in first means nothing to….well, EVERYONE.

    But OK, lets pretend there IS that much gas down there. LIke I said, and was repeated again, why wouldn’t the provincial government buy an equity stake in the project, or own it outright? You don’t need an “NB Gas”, you already have NB POWER, and gas is a form of power. LIke I said, Manitoba and Saskatchewan’s public utilities both include gas. Plus, right now is when the leg work needs to be done, plus, if you REALLY want to shut up protest, you provide JOBS.

    PROBABLY it simply sees that as a no win. The government has botched the gas file so badly now that to actually buy equity into a project would seem to be spitting in the face of protestors.

    But again, while people have no problem complaining about government, it has EQUAL trouble with the idea of simply passing out the gas to anybody. So far, all the gas goes either to the potash mine, or to Boston, with NO use locally. I still remember years ago when this was David’s chief complaint-no local use for gas.

    So I would think this would be PERFECT way to unite people. IF the province had an equity position, it would be far more likely to look out for local interests-at least more likely than Southwestern or Apache. But go read their websites, you’d think these guys were actually a charity volunteering to help out people with their energy needs.

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