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Strong U.S. Supplies Seen Limiting Canadian Prices, Alberta Drilling

Strong supplies in the United States will keep a lid on prices in the international natural gas trade with Canada and also cap the budding revival of Alberta drilling, predicts an industry voice north of the border.

The forecast of limits on the recovery came from the Petroleum Services Association of Canada (PSAC), which is highly regarded as a barometer of industry activity because its 270 member companies and their 62,000 employees are in constant and intimate touch with producers at the gas-field level.

A third quarter update forecast by PSAC parted company with other analysts' predictions of an accelerating Canadian drilling revival. Wells drilled in Western Canada this year will total 16,500, the association of supply and service contractors predicted.

The projected total is up from gloomy late-2007 expectations of a drop to 14,500 wells this year. But the new outlook of 16,500 in 2008 will still be down by 11% from the 18,557 wells drilled last year, PSAC said.

The association raised its price forecast for Canadian production to a 2008 annual average of US$8.92/MMBtu, up from previous expectations of US$8.33/MMBtu.

"The largest production increase in decades from the United States will likely shelter gas prices from increasing over what we have already seen this year," PSAC President Roger Soucy said.

By previous year's Canadian standards, the new projection is outstanding. Until 2008 "this price may have been enough to trigger another boom [in drilling]," PSAC said. But "with current cost pressures having an equalizing effect, today's gas prices are just enough to maintain activity levels that have been seen in the first half of this year."

As of the last full week of July, 459 Canadian drilling rigs were at work, a 9.5% improvement on the 419 on the job at the same time a year earlier. Demand continued to be strongest for rigs capable of reaching Canada's larger, deeper targets at depths of 2,450 meters (8,000 feet) or more, with 294 of the big rigs drilling. The currently active fleet included only 103 shallow rigs, used for low-cost but small targets no deeper than 1,850 meters (6,000 feet).

In Canada spells of peak gas demand and prices typically generate rapid acceleration of shallow drilling for small conventional deposits or dry coalbed methane seams with wells that can take less than a day. The small, shallow targets are the first casualties of lows on the economic cycle because of high costs per unit of reserves and production.

"While the price of natural gas is up, rising pressures are driving up the threshold where it it economical to extract the resource from the ground," Soucy said.

"There aren't enough workers to do the work," he added, surveying an Alberta employment market that continues to be tight due to high demand for personnel in oil sands, industrial and commercial construction.

"The shortage is also triggering an increase in labor costs. And with the high prices of oil, we are dealing with increased transportation costs and rising materials costs, especially when it comes to steel."

Alberta, source of about four-fifths of Canadian gas production, continues to dominate the industry north of the border. Of the anticipated 2008 total of 16,500 wells, 11,815 -- more than 70% -- are expected to be in Alberta.

British Columbia's (BC) gas fields continue to draw growing exploration and attract increasing interest in provincial mineral rights auctions. But BC also remains the industry's relatively expensive and technically difficult "near frontier" beyond reach for many Canadian producers. PSAC predicts 820 BC wells this year.

In Saskatchewan, where the targets are chiefly shallow gas and oil, activity will be largely unchanged at 3,445 wells this year. In Manitoba, where a well known but technically difficult oil formation has rekindled investor interests, drilling is projected to rise 12% to 360 wells this year.

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