40% Drop in Drilling Expected to Send Canadian Prices Soaring
The Canadian natural-gas community sees potentially sharp price
increases developing on its horizon, thanks to a happy coincidence
of pipeline expansions and economic conditions on the supply side.
As the Alliance Pipeline accepted its final certificate for its
U.S. leg from the Federal Energy Regulatory Commission, rising
prices were being predicted by prominent fixtures ranging from
Peters & Co., an investment boutique specializing in energy
stocks, to the dean of Canadian geological and engineering
consulting houses, Sproule Associates.
The projections hold that price increases will start long before
Alliance's scheduled in-service date, which remains postponed a
year until Nov. 1, 2000, due to regulatory conflicts last winter
and spring before the National Energy Board. Canadian approval is
expected soon, following the recent completion of the environmental
side of the Alliance case north of the border.
The price scenario, which is rapidly becoming a consensus
forecast in Canada, rests on two observations. One, gas pipeline
capacity will start increasing this fall, when expansions of the
TransCanada and Foothills-Northern Border systems will add about
1.2 Bcf/d to Canadian export capacity into the United States. And
two, the added pull on production capacity comes at a time when
producers are too weakened by soft oil prices to accelerate gas
drilling enough for a recurrence any time soon of the standard
Canadian event so far in the 1990s - rapid increases in
deliverability to surplus levels again.
The Sproule organization, which provides the supply-side
supporting testimony for TransCanada expansion applications,
expects a thorough grilling when the NEB opens hearings next month
on a proposal for adding TransCanada facilities in 1999.
Regulators, and shippers concerned over the potential toll effect
of overbuilding the pipeline grid, are expected to probe the
outlook for Canadian productive capacity much more thoroughly than
The emerging questions are not whether Canada has the resource
endowment to keep up with the pipeline grid or even whether today's
gas prices make raising production economic. The answer to both
those questions remains a resounding yes, from authorities
including the Alberta Energy and Utilities Board. The problem is
whether a production industry that focused heavily on oil for the
past two years, when its prices were high and gas pipeline capacity
was limited, now has the money to switch commodities.
The Peters investment house, which has a forecasting track
record widely accepted as one of Canada's best, portrays gas
producers as scrambling to keep up. Virtually all back pipeline
additions. But most, except for a handful of almost pure gas
producers such as Canadian 88 Energy, face "constrained" drilling
budgets due to poor oil prices. In a new review of the state of
field work, Peters says that so far this year, "natural gas
drilling in Canada has failed to materially increase
The securities firm predicts that after slipping nearly 30%, the
oil price will average US$14.50 per barrel this year and stay soft
at $15 in 1999, generating "a profoundly negative impact on
industry cash flow." As a result, total western Canadian drilling
activity could slip by nearly 40% to 10,300 well completions this
year and erode further in 1999 to 9,000 completions.
Gas completions are weakened along with oil in this scenario.
Aggressive programs of expensive deep drilling continue in the
prolific Rocky Mountain foothills of Alberta and northeastern
British Columbia among strong producers such as Amoco Canada. But
those are in the minority. Overall, the Peters firm observes that
"cost-sensitive producers are electing to consider natural gas
developments judiciously close to existing infrastructure, and in
many cases opting for well recompletions instead of new wells." In
the longer term, "natural gas fundamentals for the Canadian basin
are strong" and guaranteed eventually to generate accelerating
field development. But "in the interim, producers will maximize the
use of existing facilities, often pushing equipment specifications,
and opt for rental compression in lieu of large one-time capital
outlays involved in facilities expansion."
Gordon Jaremko, Calgary