Dave Russum, a technical specialist with AJM Petroleum Consultants in Calgary, believes that Canada reached its peak in either 2001 or 2002 when production hit about 18 Bcf/day. By 2004, production had fallen to about 17.6 Bcf/day. And Russum believes that production could fall sharply over the next two decades. In a recent presentation, he said that gas production will be “substantially lower” than what Canadian officials at the federal and provincial levels are projecting. Russum’s data shows that all types of production – conventional gas, tight gas, and coal-bed methane – will struggle in the years to come. He estimates that gas output from Alberta, which produces about 80 percent of Canada’s gas, will drop from 14 Bcf/day in 2000 to 9 Bcf/day in 2020 and to less than 6 Bcf/day by 2024.

The Canadian gas peak is important to the U.S. for several reasons. American gas production peaked more than 30 years ago, and ever since, Canada has been its main supplier. Indeed, over the past 20 years, U.S. gas imports from Canada have quadrupled. Canadian gas is critically important for New England and northern U.S. states like Michigan and Minnesota. In 2005, the U.S. got six times more gas via pipeline from Canada (3.6 Tcf) than it did in the form of LNG (631 Bcf). The Canadian situation makes emerging LNG imports to the United States even more important.

Gas is the critical ingredient for the tar sands operations in Alberta and Saskatchewan, which need up to 2 Mcf of gas to produce a barrel of refinable crude oil. Some forecasters believe that the tar sands companies could consume all of the gas that might come south through the Mackenzie Delta pipeline. Russum, a geologist who has worked in the industry for three decades, believes it is “vital” that the tar sands companies look for new extraction methods in order to reduce their gas consumption.

Further exacerbating the declining production are soaring drilling and replacement costs. Reserve replacement costs in Canada nearly tripled between 2002 and 2005 when they reached $16.55 per barrel of oil equivalent. There are other reasons to worry. Russum says that the average Canadian gas well is just one-third as productive as it was a decade ago, the decline rate has increased by more than 20 percent, and despite dramatic increases in drilling, production is not rising.

So how do investors play this trend? Russum refused to give the names of any specific equities. But he said that companies with a “strong record of gas exploration and production should be the focus.” Further, he expects spot gas prices to be depressed over the next few months. But if the U.S. and Canada have a particularly hot summer and/or a cold winter, he predicts that “gas prices will come rocketing back again. And it would be nice to buy just before that happens.”