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Stronger U.S. Dollar Lifts Canada's Gas Exports

Deliveries to the United States tapered but favorable price and currency exchange trends kept Canadian natural gas exporters running in the black through the summer, igniting a drilling revival that has continued this fall.

August pipeline exports dropped 14% to 291 Bcf from 338 Bcf in the same month of 2007, show the National Energy Board's (NEB) latest international gas trade records. But summer prices at the border were up 43% to an average US$8.44/MMBtu from US$5.91 in 2007.

The relatively strong 2008 prices more than made up for the slippage in sales volumes. Canadian gas export revenues were up 24% this August at US$2.475 billion from US$2 billion a year earlier.

The same trends showed the previous month. In July, Canadian export deliveries dropped 9% to 288 Bcf from 318 Bcf in the same month of 2007. But average prices at the international boundary were up 82% at US$11.79/MMBtu from US$6.46 in July of 2007. July export revenues were up 66% at US$3.425 billion compared to US$2.064 billion in the same month last year.

Virtually all the gains translated into the Canadian dollars that exporters take to their banks. The loonie stopped rising against the U.S. dollar, ending a year of an unfavorable exchange rate trend that penalized exporters by dismantling a former currency premium on exports.

The export currency premium returned this fall, with the loonie losing up to 20% of its value. The turn-about is largely due to dropping oil prices, Canadian financial analysts agree. The Canadian currency was traded as a petrodollar throughout the oil spike, with the value of the loonie reliably rising every time the price of a barrel of crude climbed. The same phenomenon has worked in reverse, with the loonie's value dropping as oil tumbled.

More than half of Canadian gas production is exported. About four-fifths of supplies still come out of Alberta, but activity is accelerating in British Columbia as northern versions of Texas shale extraction are developed with encouragement from provincial royalty reductions for high-technology drilling.

The favorable international market conditions continue to show in the Canadian industry's gas-field operations. As of the week of Nov. 10 a total of 441 rigs were drilling in western Canada, a 24% improvement from 357 active units a year ago.

Despite widely expected negative effects of royalty increases that the Alberta government is committed to enacting in 2009, the overall effect on western Canadian supply activity is projected to be marginal. The latest forecast by the Petroleum Services Association of Canada (PSAC) anticipates a 4% drop by the activity barometer next year to 16,750 wells from 17,400 in 2008.

The traditional yardstick also no longer tells the full story of Canadian industry activity, observe PSAC and the Canadian Association of Oilwell Drilling Contractors (CAODC), echoing observers such as TransCanada PipeLines. Western Canadian field activity is going through a qualitative change, with producers turning their attention away from shallow gas to deeper drilling targets and larger shale operations that reduce well counts but increase amounts of work and reserves additions.

"There has been a material adjustment to the days required to drill a well," CAODC observed in its latest forecast of 2009 western Canadian field activity. Since 2007, average drilling time has increased by more than 20% to nine days per well from slightly less than seven and a half days.

While the western Canadian industry changes gears, its productivity is expected to go down for at least the next year or two by agencies ranging from the NEB and Alberta's Energy Resources Conservation Board to Calgary investment houses.

In the latest forecast FirstEnergy Capital Corp., which makes a specialty of trying to keep precise track of supply trends, predicts that a drop in Alberta activity caused by royalty changes will lop 600 MMcf/d, or 1.5% off western Canadian production capacity this year.

The financial firm predicts 2009 will be a carbon copy of 2008, with western supplies dropping by another 600 MMcf/d. But the shrinkage is expected to taper to a marginal net loss of 250 MMcf/d in 2010 as British Columbia developments now beginning start to make up for erosion of older fields in Alberta. The view from the investment house, while differing in detailed numbers, parallels the outlook at the NEB, where Chairman Gaetan Caron has described shale gas as a "potential game changer."

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