CALGARY (Dow Jones)–A steep decline in Canadian natural gas drilling, coupled with increased gas consumption as more oilsands fields come onstream, could dramatically reduce the amount of gas Canada exports to the U.S. in 2007.
Analysts believe Canadian natural gas volumes available for export to the U.S. could drop by as much as 1 billion cubic feet a day, or about 11%, tightening available supply and likely ratcheting up futures prices.
“We see the supply warning lights for the North American natural gas market as already beginning to flash more brightly,“ said Martin King, an analyst at Calgary-based energy boutique FirstEnergy Corp. “But no one in the broader market really seems to be watching.“
Canada produces around 17.5 billion cubic feet of gas a day, about 50% of which is exported to the U.S, according to the Canada Gas Association. That figure is set to fall in 2007, as companies scale back their gas drilling programs because of lower prices. Since front-month gas futures prices hit a record high of $15.37 per million British thermal units in December 2005, they’ve moderated considerably due to ongoing mild weather and resulting higher inventory levels.
Canadian companies have been particularly hard hit. A strong Canadian dollar in recent years has meant they’ve been realizing lower returns for their production than their U.S. rivals. In addition, the country has a high proportion of shallow gas wells that deplete quickly and aren’t as profitable to drill at times of lower prices.
An oil boom in Western Canada, where the majority of the country’s conventional gas reserves are found, has also ramped up drilling costs in Canada more sharply than in the U.S. As a result, major producers including the country’s top three: EnCana Corp. (ECA), Canadian Natural Resources Ltd. (CNQ) and Talisman Energy (TLM), have slashed their gas exploration budgets for 2007 and invested elsewhere.
The Petroleum Services Association of Canada said in November that it expects 21,500 oil and gas wells to be drilled across Canada, a 10% drop from the expected final tally for 2006 of 23,900 wells.
Lower Output Expected
FirstEnergy’s King sees Canadian gas supply dropping by as much as 800 million cubic feet a day by July. Growing demand for gas by oil firms operating in Alberta has boosted domestic consumption by 300 million cubic feet a day in the past few months.
That sets the stage for a potential reduction in exports of 1 billion cubic feet a day in mid-2006, or “the largest reduction in export volumes in a generation,“ King said.
Last month, analysts J. Marshall Adkins and James M. Rollyson from Raymond James also forecast a decline of 1 billion cubic feet a day in Canadian exports this year.
Lower Canadian exports are “certainly a possibility,“ said Bart Melek, senior economist at Toronto-based BMO Nesbitt Burns.
“With current gas inventory levels, it’s unlikely that the price will recover any time soon, especially with the warm weather we’re seeing in North America,“ he said. “That’s certainly going to result in much lower drilling activity in Western Canada.“
The reduced drilling won’t just affect the amount of natural gas produced in Canada. Service and supply firms are already feeling the impact of a weaker drilling schedule. Steel pipe and plate maker Ipsco Inc. (IPS) cut its fourth-quarter 2006 outlook last month, citing the lower amount of natural gas drilling activity in Canada as a cause. Ipsco is a major producer of the tubular steel used in oil and gas exploration.
Ultimately, the expected downturn in Canadian gas output is part of a natural correction to current low prices, said BMO’s Melek. He expects activity to pick up once inventories are cleared and prices ramp up once more.
“We’re temporarily over-supplied at present, and that forces firms to make adjustments,“ he said. “But higher prices will return and companies will respond accordingly then as well.“
Source: Norval Scott, Dow Jones Newswires
