Canadian Natural-Gas Exports to U.S. to Drop
Thursday January 9, 9:19 pm ET
By Dina O'Meara
CALGARY -- Canadian natural gas exports to the U.S. this year will drop by as much as 700 million cubic feet, about 1% of total U.S. consumption, because of falling production and increased Canadian demand, analysts say.
The supply crunch will see natural gas prices hit and sustain high levels for the next three years, sparking fevered drilling that insiders believe still won't suffice to maintain natural gas reserves.
And as production in the aging Western Canadian sedimentary basin drops, more gas will be pulled from storage to bridge the supply gap, leaving consumers in a precarious position next winter.
"Exports are going to be down more than the production declines because we in Canada are going to need that gas," said analyst Peter Linder, with DeltaOne Energy Fund in Calgary.
Canadian gas exports to the U.S. fell 0.5% in 2002 compared with the previous year, the first such decline since 1986. The shipments, representing about three-quarters of Canada's gas sales and 18% of U.S. consumption, are forecast to drop by 2% this year against a 3% rise in domestic consumption.
Demand for natural gas in Alberta's energy-intensive oil sands region will be a major driver of that increase, as will a strong national economy, economists predict.
"That takes away gas from the U.S., and taking away gas from the U.S. obviously further exacerbates the supply-demand imbalance," said Brian Prokop, with investment brokerage Peters & Co. Limited. "Probably look for stronger pricing in the later half of 2003 and certainly into 2004."
Investment houses such as Peters & Co., Lehman Brothers, and UBS Warburg have upped their 2003 estimates for natural gas prices to between $4 to $4.25 per million British thermal units from $3.25 to $3.75/MMBtu.
Analysts are keeping a sharp eye on falling storage figures, both in Canada and the United States, to mark withdrawal trends that backup production and consumption figures.
"If the weather isn't a factor, then you're obviously seeing an increase more quickly for consumption," Prokop said.
The most recent Canadian natural gas storage levels indicate inventories Dec. 27 were about 30% lower than the previous year, at 314 billion cubic feet, and 19% lower than the five-year average of 387 billion cubic feet.
Keeping the weather in mind, November was a colder than normal month in 2002, and a warm winter in 2001 saw natural gas injections into storage continuing until mid-December.
A large portion of the gas exported south during the winter goes into U.S. storage until midyear, when demand from air conditioning units, large and small, increases.
"This summer, much of that requirement will not be met because we do not have the gas," Mr. Linder said. "And whatever gas we do have will be used to fill our storage."
He predicts an average Nymex gas price of $5/MMBtu for 2002.
In the United States, Thursday's Energy Information Administration report for Jan. 3 showed storage levels 16% lower than last year, at 2.331 trillion cubic feet, and less than 0.1% lower than the five-year average of 2.333 trillion cubic feet.
Offsetting Well Declines Challenging Natural Gas Producers
Pitted against rising Canadian demand are sharp decline rates for natural gas wells that are expected to reduce overall volumes in the Western Canadian basin this year by 500 million cubic feet from a total 17.5 billion cubic feet last year.
A recent report by Canada's National Energy Board indicated new shallow gas wells are producing 45% less than wells drilled five years ago in the Western Canadian basin and that technology such as horizontal instead of vertical drilling has only managed to flatten out supply, not increase it.
In 2002, the decline rate in the WCSB was offset by the massive Lady Fern discovery in northeastern British Columbia. However, the pool has depleted at a faster than expected rate, and no new "elephants" have been discovered.
Companies' finding and development costs are rising as a result of the smaller reserves and higher decline rates from shallow wells, causing concern for investment bankers.
"Until the industry shifts spending into less mature areas of the country, we feel it will be challenging for companies to create shareholder value," a Lehman Brothers industry update stated recently.
For Encana Corp. (ECA), one of North America's largest independent oil and gas producers and major stakeholder at Lady Fern, huge tracts of land and high tech will see its natural gas production increase 6% this year.
"We recognize that there are significant decline rates," Encana spokesman Alan Boras said. "At the same time, we believe our position of having a large land base and using technology will grow our production."
Encana holds extensive leases in Alberta, British Columbia, offshore Canada's East Coast, and in the U.S. Rockies. Part of its growth strategy includes using underbalanced, horizontal drilling to increase exposure in existing natural gas pools.
"The overall costs rise, but correspondingly, the reservoirs are more productive," Mr. Boras said.
Although drilling in the Western basin is expected to reach near-record highs, based on companies cashing in on high natural gas prices, most analysts foresee another year of flat overall production.
"This year is a write-off as far as new supply is concerned," Mr. Linder said.
The bullish analyst doesn't mean to paint a doomsday scenario around supply -- Mr. Linder says demand for natural gas in Canada and the U.S. will be met, but at much higher prices.
-By Dina O'Meara, Dow Jones Newswires; 403-531-2912 dina.omeara@dowjones.com
Dow Jones Newswires
01-09-03 2119ET
