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Canadian Natural Gas Exports Enjoying a Thaw

Canadian exports have rebounded from lows touched on depressed international natural gas markets during the last heating season, according to the latest trade scorecard of the National Energy Board (NEB).

Pipeline deliveries into the United States grew by 4.6% to 935.6 Bcf in the first quarter of the current contract year from 894.8 Bcf during the comparable Nov.1-Jan. 31 period of 2009-2010.

While modest by longer-range historical standards, the increase more than restored sales lost during the international economic slump a year ago. In the first quarter of the 2009-2010 gas contract year, Canadian exports fell by 3.7% off the 924.6 Bcf delivered into the U.S. in November-January of 2008-2009.

The NEB's monthly records also highlight the revival of the continental gas trade. The scorecard shows growth in two-way traffic, from the United States into Canada as well as the other way round.

Northbound pipeline deliveries from the United States to Canada grew by 36% to 88.3 Bcf in January from 64.9 Bcf in the first month of 2010. Southbound January 2011 Canadian exports rose by 11% to 363.4 Bcf from 326 Bcf a year earlier.

The jump by northbound flows from the U.S. into Canada is credited to rising tolls on TransCanada PipeLines' Canadian mainline to Ontario and Quebec from Alberta; buyers' ability to shop around at the Dawn trading hub in southern Ontario for alternatives made available by other delivery routes including the Alliance-Vector express lines from northern Alberta and British Columbia to Chicago and back up to Ontario; as well as new U.S. pipelines carrying shale and Rocky Mountains supplies, cold snaps and resulting winter price movements.

Re-exports can flow both ways, with both U.S.- and Canadian-sourced gas able to reach the northeastern United States by crossing the border at Niagara Falls and Iroquois. Multiple trading and delivery options at the Dawn hub are emerging as key factors in eroding traffic on TransCanada's half-century-old Canadian mainline, according to evidence in its rate proceedings before the NEB.

Supply surpluses brought on by the recession and growth of shale production have continued to erode the value of the trade, however.

Current heating season prices fetched at the international border by Canadian gas have dropped by 18% to an average of US$4.35/MMBtu from US$5.29/MMBtu in November-January of 2009-2010.

The improvement in sales volume was not enough to compensate for the price slippage. First quarter Canadian gas export revenues are off by 14% at US$4.099 billion from US$4.762 billion in November-January of 2009-2010. A year earlier Canadian 2008-2009 heating season deliveries into the U.S. fetched US$6.31/MMBtu and a total of US$5.884 billion.

Persistently unfavorable exchange rate trends -- at least from the viewpoint of Canadian gas producers and marketers -- have amplified the financial slippage. In mid-winter of 2008-2009 every U.S. dollar received for gas exports translated into C$1.22. By the start of this year the export currency premium disappeared, with each US$1.00 worth only C$0.96.

The money about-face generates bleak numbers on the NEB gas trade scorecard.

In Canadian funds, the border price for heating season exports has dwindled by 44% over the past two years to C$4.06/gigajoule (GJ) from C$7.22/GJ. In their native currency, over the past two years Canadian gas exporters' November-January revenues have likewise plunged by 43% to C$4.112 billion from C$7.217 billion.

No end is in sight to the exchange rate damage -- at least not until inflated oil prices go back down. The Canadian loonie has emerged as a petrodollar on global currency markets, thanks in large part to Alberta's role as the largest supplier of U.S. oil imports.

At the expense of natural gas, Canada's oil production and role as a mainstay of U.S. supplies is growing, and not just in the ever more environmentally controversial northern Alberta oilsands.

A large-scale switch in drilling targets has been made across Western Canada, and especially Alberta. Oil replaced gas as the target for a majority of Canadian field activity last fall for the first time in current memory, show field activity records kept by FirstEnergy Capital Corp.

As of the 2010-2011 winter drilling season, the average number of Western Canadian rigs drilling for oil at any one time stood at about 210, more than double the number a year earlier and well ahead of the 150 units still targeting gas.

The Canadian industry is applying to oil and liquids-rich gas the shale gas development techniques of horizontal drilling and hydraulic fracturing. Alberta earth scientists and engineers, while saying it is still too soon to make any reliable estimates, speculate that the field trend could significantly increase Canadian reserves of flowing liquid oil as opposed to the molasses-like product mined and thermally extracted in the province's northern bitumen belt.

FirstEnergy, meanwhile, speculates in its investor research reports that the worst is over for natural gas and sees early glimmers of hope for a price recovery starting in late 2011 or during 2012.

"Natural gas demand growth in the United States," with consumption led upwards by power stations taking advantage of low prices, "appears to have finished 2010 with its second best annual rate of expansion (3.5 Bcf/d) seen in the past two decades," the Calgary investment firm said. While not yet adjusting its forecasts upwards, FirstEnergy said, "the time for sustained bearishness on North American natural gas prices has now passed. It is not the time to get bullish, but simply to remain neutral for the time being."

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