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Canadians Eager to Fill Any Production Gap

Canadians Eager to Fill Any Production Gap

Amid warnings that natural gas supplies are poised to tighten up in the United States, Canadian exporters are lining up to fill any gap. As Joe Foster, chairman of the U.S. National Petroleum Council, voiced concerns over the future of American supplies, ProGas Ltd. filed the first application to Canada's National Energy Board for a long-term license for exports via Alliance Pipeline Project as soon as it is completed in October of 2000.

At a conference held in Calgary by the Canadian Energy Research Institute, Foster pointed out U.S. gas consumption of 21.34 Tcf and production of 18.93 Tcf were nearly 1.5% higher than expected in 1998. But the average 1998 price of US$1.96/Mcf was 18% lower than the $2.40 the U.S. industry anticipated, causing sharp contractions in investment, drilling and potentially in future supplies.

CERI was told that the council, an industry advisory agency for the U.S. Secretary of Energy, plans an inquiry into the developing squeeze. Among U.S. gas producers Foster's figures anticipate cuts in capital spending by 16% among international integrated companies, 28% among U.S. domestic integrateds and 38% by major U.S. exploration and production houses.

The view ahead from the Canadian perspective on the North American gas market continues to be different-and brighter. Thanks to favorable currency exchange rates and new pipeline capacity that started relieving bottlenecks, Canadian average prices stayed firm above C$2/Mcf for the last two years and are projected to hang in again or even improve through 1999. While Canadian producers are also cutting budgets, they are doing even more to switch targets to gas, and it now accounts for about 60% of their drilling. There is a net increase in gas drilling north of the border. As of March 14, Canadian producers successfully completed 1,112 gas wells so far in 1999 compared to 981 as of the same date last year. Although analysts such as CERI's Paul Mortensen continue to emphasize that Canadian gas drilling should eventually accelerate by as much as 20% to 6,000 or more wells per year to fill all the new export pipeline capacity, the ProGas filing underlined the immediate availability of backed-up supplies that led to the C$4.5-billion (US$3-billion) Alliance route from northeastern British Columbia to Chicago.

ProGas told the NEB that even though it now sells about 1.4 Bcf/d for about 160 producers, it has already dedicated more than enough gas reserves to the supply pool to fill its Alliance capacity of 65 MMcf/d - and much more, right now. The producer-owned marketer said its current contracts arm it with supplies of 1.52 Bcf/d - about 1 Bcf more than it sells, or a cushion 15 times bigger than the Alliance commitment. Far from coming as a surprise, Foster's warning highlighted sources of optimism on the Canadian side of the international gas market. Some of the best sources are on the U.S. side of the border. Among the good-news literature circulating around Calgary is the latest "baseline projection" report by the Chicago-based Gas Research Institute. GRI documents pressure on American supplies, and corresponding growth in Canadian exports to the U.S.

Like Foster, GRI foresees annual U.S. gas consumption rising by as much as 40% into the 30 Tcf range in 2015. But the institute adds that American exploration and production will get little help from prices to keep up with growth in U.S.demand. GRI says that in the U.S., "the prospects for increased real gas prices have essentially disappeared," because of the nature of the demand for new supplies. More than 70% of the anticipated expansion in consumption is projected to be in "price-sensitive" markets where gas competes with other energy sources: industrial consumers, electric power generation and alternative-fuel vehicles. In GRI's projections, "By the year 2015, 60% of U.S. gas consumption is in the price-sensitive markets."

Canadian confidence in taking a healthy share of the U.S. growth markets rests on solid experience, also well documented by American literature including quarterly reports on the trade by the U.S. Department of Energy's Office of Fossil Energy as well as GRI's records. U.S. gas consumption rose more than 30% in 1985-95, the first 10 years of flat to falling prices brought on by deregulation, open-access pipelines and sales competition on both sides of the international boundary. About 52% of American gas consumption is already on price-sensitive markets, GRI estimates. In those same inaugural years of gas free trade, Canadian exports nearly quadrupled, their share of the U.S. market surged to 13% from 5% and their value mushroomed to about US$6.1 billion from $1.8 billion. GRI sees the trends continuing, although at a more moderate pace because the initial upheaval brought on by deregulation has ended. "High drilling costs and limits on investment are likely to constrain the growth in activity in the Gulf of Mexico somewhat in the future. Limits on available cash flow in the lower-48 states are likely to result in some shift in the share of (North American) production to Canada over time."

The institute expects annual Canadian gas exports to climb about 50% to peak at 4.5 Tcf. Then comes a dip as Canada increasingly turns to higher-cost supplies and American producers start to catch up. But the dip is modest, with Canadian exports expected to be still 4.3 Tcf in 2015. The Canadian share of U.S. gas markets is forecast to peak at 17.4% in 2005, then hold up well at 14.6% by 2015.

In the GRI scenario, western Canada is headed for growth in gas production to the point where it "rivals the Gulf of Mexico." After 2000, the Chicago institute expects much of the growth in Canadian production and exports to come offshore of the East Coast.

Gordon Jaremko, Calgary

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