2015-16 SaskEnergy Annual Report

The Shale Gas Revolution Looking back, the natural gas market went through a fundamental change in what is now referred to as the shale gas revolution. Approximately seven years ago, horizontal drilling and hydraulic fracturing technologies were implemented on a large scale to extract natural gas from shale rock. The technology proved to be very cost effective. Prior to widespread shale gas production, natural gas was produced from conventional wells, using traditional production techniques and natural gas reserves were not growing. Production of natural gas from shale rock fundamentally shifted the gas supply balance from one of shortage to one of excess supply, which resulted in a shift to lower natural gas prices. Over the past three years, the same shale rock technology applied to natural gas production was implemented on a large scale to tight oil production. This resulted in unprecedented growth in oil production, particularly in the United States, much like what occurred in natural gas supply a few years earlier. With the dramatic increase in oil supply, oil prices also reached multi-year lows during 2015, especially into the winter of 2015-16. Natural gas and natural gas liquids – including butane, propane and condensate – are by-products of oil production, and with the growth in oil supply also came an overabundance of natural gas liquids. This past year, the price of natural gas liquids followed the same demise as oil and natural gas, trading at multi-year lows and temporarily reducing the profitability of most midstream liquids operations.

Saskatchewan Natural Gas Supply

Changing Saskatchewan Natural Gas Supply Saskatchewan is a net importer of natural gas. Annual demand exceeds production within the Province and in 2015 approximately 55 per cent of gas consumed in the Province was imported from Alberta. SaskEnergy was a net exporter of natural gas and through the shale gas revolution, transitioned to a net importer of natural gas. High natural gas prices encouraged conventional gas drilling and production within the Province, producing enough supply to meet local demand, and exporting any excess supplies to Eastern Canada or the United States. However, the sustained low natural gas prices have discouraged conventional drilling and conventional natural gas supplies have declined sharply in recent years. During the 15-month period ended March 31, 2016, only one natural gas well was drilled in Saskatchewan compared to an annual average of more than 1,000 wells prior to 2008. Meanwhile the volume of natural gas produced in the Province associated with oil production has grown from approximately 20 per cent of provincial production five years ago to nearly 50 per cent. The low natural gas prices paired with a strong provincial economy in recent years resulted in strong growth in natural gas consumption,

0 100 200 300 400 500 600 700 800 900 1,000

Saskatchewan Production Gas Supplied from outside Saskatchewan Saskatchewan Demand

particularly in the industrial sector in Saskatchewan. The need to import large volumes of natural gas supply from Alberta, coupled with growing provincial demand, put considerable pressure on existing natural gas infrastructure. Capital investment in additional pipelines and facilities has been necessary to meet the changing source of supply and demand within the Province.


Management’s Discussion & Analysis

Made with FlippingBook Ebook Creator