Canada is a very big place. In fact, Canada is the second largest country in the world, after Russia. Canada is quite a bit larger than the U.S. lower 48 states, but many people in the U.S. do not realize that because of the way most maps distort scales at higher latitudes. Even just half of Canada is larger than all of Western Europe. And due to the often harsh climate, about 90% of Canada’s population of 33 million lives within 150 miles of the U.S. border.
When you leave the major Canadian population centers, particularly “back east” in the likes of Ontario, you enter some vast open spaces. West of about Sudbury, Ontario, or so, you start to measure distances in terms of hundreds of miles. For as cosmopolitan and sophisticated as many of the big cities are – Vancouver, Toronto and Montreal – the wide-open ranges in Canada are far away from everything. Most of Canada is just plain rugged and undeveloped.
In May 2007, I traveled to Alaska to see the Alaska Pipeline and tour the Prudhoe Bay oil field. The route of flight to Anchorage took me over central and western Canada. I was fortunate to be flying on a clear day. As I looked down from the aircraft, I could see many dozens of oil and natural gas fields. The layout of the rig roads and drilling pads was apparent, at least to my eye. There was oil patch after oil patch for almost as far as I could see – which was pretty far from my perch at 38,000 feet. From the air, some parts of the ground were drilled up like a pincushion. But other stretches of this endless vista had almost no sign of human or industrial development whatsoever. What was I seeing? From my background in geology, I knew that I was traveling over a geologic feature called the Western Canadian Sedimentary Basin.
The Western Canadian Sedimentary Basin is a large area of the Earth’s crust that has filled with sediments over a very long geologic time. There are sandstones, shale and limestone, and numerous related kinds of sedimentary rocks. In short, there is everything that Mother Nature would ever need to form hydrocarbon deposits. Toward the west of the Western Canadian Sedimentary Basin, in the Alberta region, the total thickness of the sediments is well over 2 miles.
So these kinds of sediments in the Western Canadian Sedimentary Basin, coupled with the structural history of the region, hold immense resources of hydrocarbons. There are conventional resources of oil and natural gas hidden in structural and stratigraphic traps. There are thick seams of coal, filled with coalbed methane gas. And there are the famous tar sands of Alberta. Thus is the Western Canadian Sedimentary Basin one of the major oil and natural gas producing areas of North America. That is why I saw so many oil and gas fields as I flew from Minnesota to Alaska.
Today, when many people think of Alberta, they probably think of the tar sand plays that have received so much attention in recent years. In the quest for oil from the tar sands, literally hundreds of billions of dollars worth of capital investment has poured into this region from every corner of the world. There is no question about it, but Alberta is home to one of the most significant hydrocarbon resources on the face of the planet.
Yet Alberta is also an old oil- and gas-producing area in its own right. The first significant oil discovery in the Western Canadian Sedimentary Basin was in 1948, in Alberta. And the Western Canadian Sedimentary Basin has been a lucrative oil province ever since. For many years, the Western Canadian Sedimentary Basin has been one of the most active onshore drilling locales for conventional oil and natural gas in North America. The Western Canadian Sedimentary Basin yields 98% of the natural gas that Canada produces. And 15% of the U.S. gas supply comes from the Western Canadian Sedimentary Basin. So the Western Canadian Sedimentary Basin is really a critical part of the North American gas supply chain.
One big problem in the Western Canadian Sedimentary Basin, however, is depletion. The really large gas fields have been discovered and drilled. Now the drilling is focusing on the smaller, more dispersed fields. Sure, the resource is there, but it takes more work to locate the gas and be able to drill it up and book it as reserves. And then the well operators have to extract that natural gas and get it to market. And each year, the gas output rates are falling in the Western Canadian Sedimentary Basin, even from new fields. That is, it takes more and more drilling just for output to stay essentially even, year over year. An acquaintance of mine, David Hughes, who works for the Geological Survey of Canada, gave some pretty impressive – kind of scary, really – briefings on this at the past couple of meetings of the Association for the Study of Peak Oil & Gas (ASPO). It takes more and more drilling overall just to keep output steady. That’s ominous.
Another problem for the Western Canadian Sedimentary Basin has been the relatively low price for natural gas in North America in the past couple of years. When gas was selling at $12-15 per mcf about two years ago, those were the salad days for drillers. But now the North American gas price is in about half that range. And the drilling industry in the Western Canadian Sedimentary Basin has slowed down quite a bit. Still, there is a lot of continuing and ongoing drilling activity in western Canada. The industry does not just turn on and off like a light switch. But we are not seeing drilling at the level of what we would call a “gas boom” (no pun intended). Still, that could change quickly if the price for natural gas begins to rise comparable with the recent price increases for oil.
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Editor’s Note: Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. Byron is also co-editor of Outstanding Investments , and editor of Energy & Scarcity Investor.