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Canadian Gas Exports, Prices Fall in First Half

Canadian export volumes, prices and revenues all fell sharply in the first half of the 2008-2009 natural gas contract year, show trade records kept by the National Energy Board (NEB).

Pipeline deliveries to the United States dropped by 12.3% to 1.785 Tcf during the six months of November through April from 2.035 Tcf in the same period of 2007-2008. Prices fetched by Canadian gas at the international boundary lost 35% by plunging to a six-month average of US$5.32/MMBtu from US$8.19/MMBtu in November through April of 2007-2008.

Favorable currency exchange rate movements partially offset the damage. In Canadian funds, the price drop was 19.8% to C$6.12/gigajoule (GJ) in the first half of contract year 2008-2009 from C$7.64 in the same period of 2007-2008.

But the combination of shrinking volumes and retreating prices had withering effects on revenues as measured by any yardstick. In the buyers' currency Canadian gas exports fetched a total of US$9.57 billion in November through April of 2008-2009, down 43% from US$16.73 billion for the same period a year earlier. In the sellers' dollars the slippage was 29%, down to C$11.82 billion from C$16.74 billion.

The erosion of the international gas trade, blamed chiefly on a combination of recession weakness in demand and surging U.S. production from new shale basin sources, also shows in an annual review of pipeline traffic that the NEB released Thursday.

Capacity utilization on TransCanada PipeLines' eastbound gas turnpike from Alberta to the U.S. and central Canada fell to an average 72% of its maximum 9 Bcf/d in 2008 from 75% in 2007. The slippage happened even though one of seven lines in the right-of-way was closed for conversion to oil service, reducing gas capacity by about 500 MMcf/d.

The biggest drop in traffic was on the Foothills-Northern Border route from Alberta to the U.S. Midwest. Capacity utilization slid to an average 72% of the line's maximum 2.5 Bcf/d in 2008 from 85% the year before. The NEB attributed the decline to new U.S. competition -- the opening of the Rockies Express Pipeline connection for 1 Bcf/d between prolific gas fields in the western states and markets in the Midwest.

Besides the immediate market conditions of flat demand and fresh U.S. supplies, the NEB observed that the gas trade is also being eroded by increasing consumption in growing thermal oilsands production in Alberta and natural reserves depletion.

The export setbacks, which affect more than half of Canadian production, prompted further lowering of industry expectations. FirstEnergy Capital Corp., which makes a specialty of tracking gas in detail, cut its price projections by 11% to an average US$4/MMBtu for 2009 and US$7/MMBtu for 2010. Translated into loonies received at the AECO trading hub in southeastern Alberta, the new price projections work out to C$3.46/Mcf this year and C$6.87 for 2010.

The drop in anticipated annual averages will include severe shocks this summer, FirstEnergy added, echoing an earlier warning to brace for a plunge to a low market bottom at prices liable to sink below C$2/Mcf (US$1.78) by rival Calgary investment house Peters & Co.

FirstEnergy predicted that "Canadian producers are going to be facing forced production shut-ins and/or extremely low gas prices for a period of time by early August of this year. There is simply too much gas in the system."

As in the United States, storage facilities in Canada were approaching full by early July. "Forcing more gas into exports once Western Canada gas storage is full will only bring about very low prices. Once the U.S. market is satiated, prices will correct much lower and producers will simply shut-in production for a period of time before the next [storage] withdrawal season gets under way. This day is drawing ever closer," FirstEnergy said.

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