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Canadian Producers Predicting Price Jumps

Canadian Producers Predicting Price Jumps

Canadian producers expect their natural gas prices to rise by as much as 60% when the next heating season catches up with effects of the 1998-99 drilling slump.

At Poco Petroleums Ltd., a top ten Canadian producer, Marketing Vice President Bob Weiss says he would not be surprised to see a jump into the range of C$4 (US$2.65) from this spring's C$2.50 (US$1.65). He also says he hopes the increase is not so dramatic, because any such surge is bound to drive away prospective long-term buyers, led by gas-fired power projects.

Variations on that theme have also been repeatedly sounded by other top ten Canadian producers such as Anderson Exploration and Alberta Energy. Poco only states the outlook more graphically because it is the most bearish on gas supplies.

"The day of reckoning is coming," Weiss is telling all comers, from financial analysts to journalists attending sessions on prospects for Canadian gas. Poco reckons Canadian pipelines are running with about 1 Bcf/d in capacity to spare because producers have been unable to keep up with expansions. The firm suggests there is an element of illusion to Canadian drilling figures, which record more than 1,500 wells drilled in first-quarter 1999 or about the same number as a year earlier. Many of the wells are thought to be re-entries of old sites to pick up temporary supplies of short-lived reserves for the lowest possible cost.

At the same time, the Canadians believe production in the United States is falling off by two to three bcf daily as a result of disappointments in the Gulf of Mexico and the general deterioration of drilling due to the past year of poor oil prices. Just how much production capacity is being lost in the U.S. will become readily apparent in November, predicted Poco President Craig Stewart. His organization sees highly-touted deep drilling in the Gulf of Mexico as a disappointment because much of the gas involved is associated with oil, which hurts its economics, and it is less abundant than many believed in any case. He acknowledged he has been saying much the same thing about U.S. supplies for more than two years, but added that his reception by the analyst and economist community has become considerably more accepting in recent months.

Alberta Energy, while less ready to debate U.S. gas performance, is predicting similar results. From the Canadian perspective, there will be "a very strong continental gas market." The company is continuing an aggressive drilling program aimed at achieving 900 MMcf/d this year and 1 Bcf/d in 2000.

Alberta Energy president Gwyn Morgan told the company's annual meeting that "historic market changes" are at hand, "as new gas export pipelines give Canadian producers unrestricted access to U.S. markets." Counting 1998-99 expansions by the TransCanada and Foothills-Northern Border systems plus the Alliance Pipeline Project, now under construction, about 2.5 Bcf/d will be added to Canadian export capacity by the fall of 2000.

Only time will tell how much of the new capacity will go unused, and for how long, but that is being described as the pipelines' problem except to the extent that shippers wind up paying for space they cannot fill. Morgan said the bottom line is, "Canadian gas producers no longer have to worry about 'trapped gas' in Alberta. The change, to where Canadian natural gas is no longer sold below its international value, represents a transition that I've awaited for 30 years."

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