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Drilling Slowdown, Rising Consumption Cut Canadian Exports to U.S.

Canadian natural gas exports have tapered off in a gentle decline expected to foreshadow deeper drops through 2007, when reduced drilling and increased domestic industrial consumption are forecast to keep eroding supplies.

In the first 11 months of the 2005-06 gas contract year, the latest fully reported period in the National Energy Board's records on the trade, pipeline deliveries to the United States slipped by 5% from the comparable time a year earlier.

Canadian exports in November 2005 through September 2006 declined to 3.25 Tcf from 3.4 Tcf in the first 11 months of the 2004-05 gas contract year. The slippage averaged 460 MMcf/d.

Deliveries were off in four of six regions tracked as export destinations by the NEB. Exports to the U.S. Midwest dropped by 3.6% to 1.38 Tcf. Pipeline shipments to the U.S. Northeast declined 4.9% to 1.09 Tcf. Deliveries to the U.S. Pacific Northwest fell 17.2% to 346.4 Bcf.

Exports to California rose by 1.6% to 416 Bcf in the first 11 months of the 2005-06 gas contract year. In the smallest Canadian export destination, the U.S. Rocky Mountains region, shipments went up 37.3% to 16.6 Bcf.

The decline in shipping volumes last year went by largely unnoticed because it was masked by increased prices, especially in the first half of the 2005-06 contract year when markets spiked on hurricane damage to production in the Gulf of Mexico.

Canadian exports from November 2005 through September 2006 fetched an average of US$7.60/MMBtu at the international boundary, up 11% from $6.85 for the same period a year earlier. Average prices for Canadian gas were up 13% at US$7.19/MMBtu in California, up 10.6% at $7.56 in the Midwest, up 9.5% at $7.93 in the Northeast and up 15.7% $7.26 in the Pacific Northwest.

The higher price averages more than compensated for the delivery volume declines. Canadian gas export revenues for the first 11 months of the 2005-06 contract year were US$24.96 billion, up 5.4% from $23.69 billion for the same period a year earlier.

The dropping volumes were blamed on reductions in import demand as U.S. storage facilities filled up in mid-2006, as well as on reduced drilling and rising domestic industrial consumption in Canada.

Canadian industry analysts, such as Calgary energy investment specialists FirstEnergy Capital and Peters & Co., predict the decline in supplies will continue through 2007 but at an accelerated pace.

By the second half of this year, FirstEnergy calculates Canadian supplies on the international market will drop by as much as 1 Bcf/d -- more than double the 2005-06 decline averaging 460 MMcf/d.

The 2007 deepening of the export supply erosion is seen coming due to rising gas consumption by Alberta thermal oil sands projects, on top of reduced prices and cost-control budget cuts by producers.

A Canadian industry benchmark, weekly counts of active drilling rigs, continues to confirm that producer activity is decelerating. As of this week 423 rigs were recorded as busy on counts maintained by the Canadian Association of Oilwell Drilling Contractors. At the same time last year, 598 rigs were drilling during an all-time peak of Canadian field activity. It went down in producer records as a time of "hyper-inflation" when competition for labor and equipment drove costs up to a point where companies began cutting budgets regardless of where gas prices were going.

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