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Gloom Is Fading in Canada's Energy Patch

Canadian natural gas exporters, putting formerly negative currency and price trends behind them, are marching back into positive income and drilling territory, government and industry records show.

Revenue from pipeline deliveries to the United States climbed 11% to C$19.6 billion (US$19.6 billion) during the first seven months of the current gas contract year ending Oct. 31, the National Energy Board (NEB) reports. In the comparable 2006-2007 period of Nov. 1 through May 31, exports were worth C$17.6 billion (US$15.3 billion). Average prices fetched at the international boundary rose by 3% to C$7.91/gigajoule (GJ) (US$8.53/MMBtu) in November through May of 2007-2008 from C$7.68/GJ (US$7.20/MMBtu) during the same period a year earlier.

Canadian gas deliveries to the U.S. increased by 8% to 2.3 Tcf in the first seven months of the current contract year from 2.1 Tcf during the same period of 2006-2007.

The past winter and spring marked a turning point that enabled Canadian exporters to start reaping positive results from improvements in international prices denominated in U.S. currency for increased sales volumes. The key change was stabilization of the exchange rate between the Canadian loonie and the American dollar, with the currencies staying close to par. Previously, sharp increases in the relative value of the Canadian money had the effect of gutting the U.S.-dollar prices for exports, which also depressed the value of domestic sales because they closely track international trends on the integrated continental gas market.

The squeeze shows vividly in records kept by GLJ Petroleum Consultants Ltd., a Calgary-based mainstay of the Canadian industry. Between 2003 and 2007 the annual average value of the loonie climbed 30% to US$0.94 from US$0.72. The currency's upward spiral took away all gains from rising gas prices. In U.S. currency annual average gas prices rose 27% over that five-year period to US$6.92/Mcf from US$5.44. In Canadian loonies, annual average prices lost a penny to C$6.65/Mcf from C$6.66.

In Canadian currency, average border prices fetched by exports plunged by almost 50% from C$12.00/GJ in November 2005 to C$6.50 in November 2007. Monthly export revenues likewise dove from about C$3.7 billion down to C$2.1 billion.

With up to 60% of Canadian production traded internationally, the price and revenue drops contributed to two years of erosion and stagnation in drilling. The trends heightened speculation that Canadian gas was entering a period of accelerating decline as a factor on the international market.

The gloom is fading away. Financial analysts, the NEB and Alberta's Energy Resources Conservation Board continue to predict a natural decline in Canadian supplies on the order of 2% a year, due to inevitable deterioration of deliverability in gas fields dating back to the 1950s in Alberta, source of four-fifths of the nation's output. But some experts -- notably at TransCanada Corp., the country's largest gas transporter -- are urging industry and government peers to rethink the forecasts.

Widespread forecasts of a steep drop in Canadian gas supplies did not come true so far this year. FirstEnergy Capital Corp., which makes a specialty of tracking producers, calculated in a research note that the supply slippage was a "scant" 100 MMcf this July compared to the summer of 2007.

FirstEnergy speculated that there was a supply surge due to completions of field maintenance programs, but added that the market may also be seeing early results of growth in production from unconventional or tight gas reserves, particularly in northern British Columbia. Coalbed methane exploitation, still a fledgling newcomer in Canada, shows signs of reviving in Alberta. Improvements in horizontal drilling and geological fraccing or fracturing technology are opening new geological production zones, especially in northeastern British Columbia.

TransCanada, in intimate touch with gas fields due to its ownership of Alberta's Nova gathering pipeline network, has repeatedly reported a qualitative change is under way in supply development. Activity is migrating away from picked-over shallow, small drilling targets on the plains of eastern Alberta and western Saskatchewan to deeper or more technically difficult but always bigger sources along the foothills of the Rocky Mountains in western Alberta and northeastern B.C.

The trend shows in records kept by Peters & Co., a Calgary-based energy shares boutique that keeps especially close track of industry supply and service contractors. The average number of days spent on western Canadian wells by drilling rigs is on the rise.

So far this year, contractors have averaged more than eight days per well, up from about seven last year and a low of less than a week at the height of a shallow drilling boom in 2004. The trend shows most strongly in B.C., where since 2006 the amount of industry time invested per well has climbed 43 % to more than 18 days so far this year from about 12 and a half in 2006.

As of the past week, the number of drilling rigs working in western Canada stood at 469, up 17 % from 402 in early August a year ago. Echoing TransCanada, financial houses such as Peters are urging investors and industry agencies to sharpen forecasting tools by looking beyond traditional well and rig counts and incorporating other indicators reflecting the increasingly sophisticated character of Canadian gas operations.

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