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Outlook Bleak for Canadian Exports, Data Show

Canadian exports show signs of confirming a bleak outlook for the supply side of the natural gas trade by continuing to shrink, a view of the market that is also supported by the latest International Energy Agency (IEA) annual forecast.

Pipeline deliveries to the United States fell again in August, according to the latest export count by the National Energy Board (NEB). The volume figures have consistently registered drops in traffic since spring 2008, reversing a previously unbroken trend of continuous growth in Canadian sales into the U.S. since the late 1980s.

The summer decline was only 1.2%, down to 288.3 Bcf from 291.8 Bcf in August 2008. But for the first 10 months of the contract year that ended Oct. 31, Canadian exports fell by 11.5% to 2.787 Tcf from 3.149 Tcf during the November-August period of 2007-2008.

August export prices at the international border averaged US$3.20/MMBtu, down 62% from US$8.44 in the summer of 2008. For the first 10 months of the current contract year export prices averaged US$4.61/MMBtu, or 48.7% less than the US$8.99 chalked up in November-August of 2007-2008.

The bleak outlook was also seen in the latest IEA annual forecast (see related story). The IEA report highlighted an abrupt about-face in gas trade forecasts that is viewed with growing alarm by Canadian producers and field work contractors.

The agency said it is too soon to know whether such resources are available overseas or whether the new production methods can be successfully transplanted, but the change in the United States and Canada already looks great enough to affect the entire global gas market.

In Canada, the world's second-biggest gas exporting country after Russia, effects of unconventional development led by shale continue to be hotly debated. Long-range results are especially questioned, with engineering and geology consulting firms pointing out that shale gas production is still too new for a reliable supply forecast to be made.

But industry participants suspect that the current glut has months if not years left to run. The Petroleum Services Association of Canada and Canadian Association of Oilwell Drilling Contractors, whose employers and analysts have been badly bruised by sharp cuts in field activity since 2006, are braced for prices to stagnate around C$5/MMBtu (US$4.70) through 2010. Both groups forecast that such lean prices will depress drilling into a supply industry hardship range of about 8,000 wells per year in 2009 and 2010, or only one-third of the pace of earlier this decade.

A substantial faction among Canadian financial analysts also is convinced that the field contractors are erring on the gloomy side.

Canaccord Adams foresees, as noted in a current investment research report, a "significant recovery" developing for energy prices that will push gas back up to an average of US$6/MMBtu in 2010. FirstEnergy Capital Corp., calling itself "bullish" in its current research, is predicting US$7 next year.

FirstEnergy, which makes a specialty of gas market studies, said the count of active U.S. drilling rigs has dropped below a "tipping point" where enough wells are drilled to maintain U.S. domestic production unchanged. The Calgary investment house, in a study done in March, initially estimated the benchmark was 1,230 rigs. The latest version of the arithmetic, taking more data on well completions and production into account, pegs the turning point where supplies begin to deteriorate at 950 gas-directed rigs.

Forecasting U.S. activity to stay stuck at 700-800 gas rigs, FirstEnergy said, "At the latest, we believe that significant reductions in gas supply will begin to crop up by early 2010." The firm's analysts foresee a total North American production capacity drop developing of more than 4 Bcf/d, including declines of 2.5-3 Bcf/d in the U.S. and 1.5 Bcf/d or more in Canada.

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