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Abundant Gas Supply Clogging U.S.-Canada Trade

Glutted markets slowed natural gas trade between Canada and the United States in the first six months of this year -- and inflicted severe price cuts on market participants, according to the latest import-export records released by the U.S. Department of Energy's Office of Natural Gas Regulatory Activities.

Pipeline deliveries to the United States from Canada shrank by 6.6% to 1.53 Tcf from Jan. 1 through June 30, compared with 1.64 Tcf in the same period of 2011. U.S. exports to Canada dipped by 2.1% to 483.4 Bcf in the first half of 2012 from 493.7 Bcf during the same period the previous year.

The average price fetched by Canadian gas at the international border plunged by 42.9% to US$2.43/MMBtu in January-June 2012 from US$4.25/MMBtu during the first half of 2011. The average value of U.S. gas entering Canada fell by 40.9% to an average of US$2.72/MMBtu in the first six months of this year from US$4.60/MMBtu in the same period of 2011.

The smaller trade in gas between the U.S. and Mexico showed growth, but only in the southbound direction. Exports from the United States to its southern neighbor rose by 14.5% to 283.9 Bcf in the first half of 2012 from 248 Bcf during the same period of 2011. U.S. imports from Mexico dropped steeply, by 83.2%, with the northbound traffic all but halted at only 200 MMcf in the first six months of this year compared to 1.2 Bcf during the first half of 2011.

The average price fetched by U.S. deliveries to Mexico fell by 41.2% to US$2.58/MMBtu in the first half of 2012 from US$4.39/MMBtu during the same period of 2011. Mexican shipments to the United States lost 55.8% of their value, down to US$1.57/MMBtu in January-June of this year from US$3.55/MMBtu in the first half of 2011.

Abundant U.S. production severely eroded overseas traffic in liquefied natural gas (LNG). Tanker deliveries to the United States fell by 57.8% in the first half of 2012 to 87.2 Bcf, and their average price dropped by 29% to US$3.56/MMBtu. A formerly lively market in re-exported LNG dried up. Tanker sailings bound from U.S. terminals shrank to zero in the second quarter of 2012. In the first half of this year re-exports were down by 66.5% to 10.6 Bcf, although their average price rose by 41.4% to US$16.65/MMBtu.

Canadian industry analysts said they are starting to see some signs of a U.S. market recovery. The hopes are largely pinned on anticipated growth in replacement of coal-fired power generation by gas-fueled power stations. But Canadian consensus that much time will be needed to burn off gas surpluses still prevails.

As heating season arrived north of the border, the Canadian counterpart to the U.S. barometer of market conditions -- gas in storage -- was still signaling that supplies were at record high levels, reported the Toronto-based Canadian Gas Association (CGA) and First Energy Capital Ltd. in Calgary. As of the end of September, Canadian storage facilities held 796 Bcf of gas or 8% more than the previous record for early fall of 734 Bcf set in 2011.

The association, in an annual pre-heating season update bulletin aimed at consumers, said "customers are expected to continue to benefit from low prices" despite a slight recovery from the spring bottom of C$2/MMBtu (U.S. dollar at par). Early fall Canadian prices remained about 30% below September 2011 levels.

"Canadians can look forward to another winter heating season of stable natural gas commodity prices," CGA said. The central Canadian association, voice of local distribution and sales companies, drew no quarrels from industry mainstay forecasters in the gas supply capital of Calgary.

Even in the fourth quarter of this year, as furnaces light up across the country against the onset of fall and winter frost, GLJ Petroleum Consultants Ltd. predicted that gas would average C$2.92/MMBtu. For 2012, the firm predicted an average price of C$2.35/MMBtu, down 35% from C$3.62 in 2011. GLJ, a market conservative, was only slightly less optimistic than rival AJM Deloitte, which projected a 2012 full-year average price for Canadian gas of C$2.50/MMBtu.

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