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Alberta’s natural gas industry is unlikely to return to its former prominence in the provincial economy, leaving a gap that will have to be filled through diversification, a report said Monday.

Already reeling from a precipitous drop in prices, the province’s natural gas industry faces major long-term challenges amid a glut of new supplies, according to the report by TD Economics.

And after fuelling government surpluses with royalty windfalls, the dramatic shift in Alberta’s natural gas industry poses major threats to the entire economy, the report said, with the province already facing a deficit of nearly $7 billion this year.

“That’s the worry: how quickly that geological advantage has turned into a disadvantage,” said Derek Burleton, the bank’s director of economic analysis and author of the report.

“The concern–and rightly so–is that this could persist. This just isn’t a one-or two-year thing.”

Alberta must be prepared to adjust its course and start laying the groundwork for other industries to diversify the economy, even though momentum could shift back into the province’s favour when gas prices start to rise, he said.

“But I don’t think it’s going to occur by luck, I do think a lot will depend on the evolution of policy in the province,” Burleton said.

New technology is unlocking vast shale gas resources across the continent.

That has swamped North American markets with supplies just as the recession put a damper on demand for the fuel.

The result is a price far below what is deemed economic, prompting Alberta producers to halt drilling plans and shut in production until prices improve.

The bank’s analysis follows other recent reports on the dim outlook for Alberta’s natural gas industry. The Conference Board of Canada said earlier this month that profits for Calgary’s natural gas producers will fall more than 60 per cent this year to their lowest level in a decade.

The National Energy Board also forecast big declines in Western Canada’s natural gas supply over the next two years as drilling levels succumb to low prices.

On Monday, natural gas prices fell 25.6 cents to$3.729 per million British thermal units on the New York Mercantile Exchange, as concerns over record storage levels continued.

Gerry Goobie, an analyst with Calgary-based energy consultants Purvin&Gertz, said the natural gas industry looks “pretty gloomy” after two years of weak prices.

“Will it turn? Almost certainly, but when and how much, that’s the question,” he said.

“I don’t think it’s the end of the industry. I think the industry has got a lot of life left in it for future years.”

The TD report also noted that Alberta, a major exporter of gas to the U. S., is also facing increased competition from other parts of Canada–British Columbia, in particular –in export markets.

But technology could also prove a “saviour” to Alberta’s natural gas industry, the report noted, with innovation boosting conventional recovery or cracking hard-to-recover unconventional supplies.

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