Y2K, in case you missed it, was quite the spectacle. Or, better said, the run-up to Y2K was quite the spectacle. Speculation ran rampant, because internal logic of mainframe computer systems (that ran everything in society) was based on a two-digit year count, meaning when Y2K hit, the computers would be utterly confused and not know if it was 1900 or 2000, and everything bad would happen. Planes would fall from the sky. Power grids would collapse. Banks would cease to function.
People began hoarding odd things that were imperative to their world. Some just filled bathtubs and buckets in case water was no longer available. Then we all sat and waited for the doom to swallow us, one way or the other.
And…nothing happened. Nothing at all. It was the oddest thing, because by mid morning on January 1, 2000, all the fear-mongers sheepishly just disappeared from the scene. Not a single plane fell from the sky. ATMs still worked. Bathtubs were quietly drained, and people forlornly looked at their pantry and wondered what they would do with 200 cans of beans. We ground through our hangovers, and life went back to normal by 10 am on January 1st.
But something crazy did happen in Alberta, right around that time, that was earth-shaking in its own right, something that set in motion a chain of events we are still trying to deal with to this day. It had nothing to do with computers’ year count digits, and everything to do with natural gas price digits that went into uncharted waters.
Until the mid-1980s, natural gas prices were regulated, and were low but relatively stable. The price level worked reasonably well in terms of satisfying the needs of industrial users, for supporting production and exports, and for meeting the needs of consumers (with some government assistance to keep the price lower than market) (and when I say “worked reasonably well”, I really have no clue, I wasn’t around then, and without social media most shouting was highly localized, and so there may have been discontent, but it was not structurally problematic as prolonged price crashes can be.). The overall price level did creep up over the years, and by the early 1980s, even with regulation, prices hovered in a band of about $1.50-2.50/GJ (if you’re reading up on the subject, and who wouldn’t, you may often encounter prices quoted in dollars per mcf (thousand cubic feet). There isn’t a straight numerical conversion from $/GJ to $/mcf because it depends on the heat content of the gas stream. Shallow gas tends to have very little natural gas liquids (dry gas) and in that instance the $/mcf price would be about 5 percent higher than the $/GJ price (richer gas can be 10-12 percent higher numerically on a $/mcf basis).
The situation changed significantly in 1986, when prices were deregulated. They promptly went straight into the toilet, remaining there for nearly 15 years. In the 1990s, Alberta’s natural gas price averaged $1.63 per GJ. Given that that was a pretty good price for the era, that reduction was not particularly problematic either. Natural gas had been, since inception of development, quite a cheap fuel.
Everything changed, as noted above, right around the year 2000. Strong industrial and heating demand sent prices to levels never seen before. In calendar 2000, the Alberta price averaged $4.27/GJ. The next year was even stronger, clocking in an average of $5.12/GJ. Natural gas prices remained elevated through the decade, peaking at an annual average of a whopping $7.47/GJ in 2008.
Short-duration gas price spikes don’t really change producer activity much, because usually, if weather driven, they don’t last, and there isn’t time to drill new wells to take advantage. The 2000’s were different though; high prices remained elevated for a decade led to a flurry of development activity. Drilling activity spiked all over the province, new fields were developed, plumbed in, and brought online, and the phrase “coalbed methane” became surprisingly well known. It was a glorious decade for gas producers, and the government thoroughly enjoyed rolling around in all that royalty money.
It was all too good to be true. The 2010s brought the shale gas revolution, and the market promptly flooded, both here and in the US. Dramatic production increases from very long fracked horizontal wells flooded the market; producers burned through vast amounts of capital through sheer enthusiasm, not taking their foot off the throttle as production soared and prices crashed. As the decade rolled on, things became bleaker and bleaker, until by 2018 the annual average price had fallen to $1.29/GJ, roughly what it had been in Alberta in the 1970s.
Natural gas infamously became one of the few goods that depreciated in value over time, while the rest of the world saw cost appreciation. Operating costs – municipal property taxes, compression costs to get gas to mainline pressure, wages, materials, goods and services – all marched relentlessly higher, while the market value of the commodity fell and fell.
Usually supply and demand works itself out in the marketplace; low prices are a signal to cut back on production, and part of the industry – the purely natural gas part – did cut back on drilling and development. People on the street no longer talked about coalbed methane. But because oil prices remained high, development of liquids-rich gas plays accelerated through the shale era, with gas being dumped on the market as more or less a byproduct. The higher oil prices went, the more incentive there was to drill liquids-rich gas, and the more that was drilled, the more the gas market became flooded.
Low-rate, shallow gas fields were caught in a terrible squeeze. Thousands of wells generated barely enough revenue to cover operating costs, and some companies folded entirely, handing the entire problem to the Orphan Well Association. Large swaths of the province faced a very huge problem: What would happen if all those thousands of wells, thousands of miles of pipe, and all the associated infrastructure was shut in due to poor economics? Once shut in, the abandonment clock starts ticking, and the problem would be massive. The costs to abandon everything would be just the tip of the iceberg as far as provincial problems go though; if those fields had all the plumbing removed and abandoned, the resource could well be lost to the province forever. In today’s challenging regulatory and cost environment, where it is difficult to build anything, it is hard to imagine what price natural gas would have to go to – and stay there, for years and years and years – before anyone would re-develop a shallow gas field from scratch.
That’s all very problematic for the industry, whom people may or may not shed tears for. But the problem accelerated to a new level as it became clear just how bad this situation was for government coffers. the Alberta government, come year end, rips through the numbers to see just how much has been taken in from royalty payments. It’s like kids on Christmas morning. They open the box marked “Oil” first, and, using 2025 as an example, were not disappointed, finding inside something in excess of $20 billion. Next, they opened the one marked “Natural Gas”, and they found like twelve bucks.
What to do? The situation is, as a colleague calls it, the impossible box. Any move in any direction creates a new problem. Gas royalties are price sensitive, so the only way to generate a lot more royalties is through increased production (which has nowhere to go, and no one wants to increase production anyway at these prices), to increase gas prices in the province (good luck with that), or to raise royalty rates, which would simply be adding fuel to the fire and making even more wells uneconomic. The government looked under all the rocks, including auditing Gas Cost Allowance (a legit royalty deduction) like airport dogs on luggage, which will not bear much fruit. But the essential structural problem remains: the oil patch has been so successful at unlocking hydrocarbon reserves that it has generated an excess of gas that has put one segment of the industry at risk, with no clear way to increase prices.
The government hasn’t given up though. The problems are starkly clear, as are the paths forward. Ultimately, the only real way to increase prices meaningfully, when producers are capable of producing vastly more, is through higher demand, and it must be materially higher demand. That means attracting new business to the province and increasing exports of LNG or otherwise piped gas that can access higher-priced markets. The data center demand is therefore a very big deal for the province; in addition to all the ancillary benefits of multi-billion-dollar investments, if enough of the beasts are built here, it would help solve the conundrum of the shallow gas industry that got into a fearsome predicament through no fault of their own. In 2005, no one would have predicted that the price would fall by 75 percent a decade and a half down the road.
If southern Alberta’s shallow gas resource is allowed to die, it would be catastrophic for the province. The phrase used often and incorrectly by anti-hydrocarbon activists circa 2019 – “stranded assets” – could actually become a reality. Infrastructure and wells would be abandoned, and to rebuild at some point in the future would require massive capital, which would mean sustained high prices over years and years, which would mean the bigger plays to the north have been exhausted. So, think decades in the future. If those prices never rose to a high enough level for a long enough period, tens of billions of cubic feet of natural gas might remain there forever, discovered, mapped, and handy, yet inaccessible if capital redevelopment costs preclude their future access.
Whether you’re a friend or foe of the government, wish them well as they try to resolve a vexing problem with no easy answer. Their success will mean less of a hit to your pocketbook down the road, no matter where you live in Canada.
At the peak of the energy wars, The End of Fossil Fuel Insanity challenged the narrative of imminent fossil fuel demise, facing into the storm. And now everyone is coming around to this realization as well. Read the energy story for those that don’t live in the energy world, but want to find out. And laugh. Available at Amazon.ca, Indigo.ca, or Amazon.com.
Email Terry here. (His personal energy site, Public Energy Number One, is on hiatus until there are more hours in the day.)