Canadians are being told — by American investors on the prowlfor pieces of the action — that the North American natural gasmarket is headed for a spell of very tight supplies and they standto be prime beneficiaries. The projection emerged as a consensus ata Calgary conference billed as the mightiest assembly of financialmuscle ever held in the Canadian gas capital.

A Florida-based investment house — Raymond James &Associates Inc., the top off-Wall Street brokerage, with about1,400 offices including a busy one in Calgary — took north 16specialty houses in private placements of sophisticated investorfunds as “energy capital providers.” The group, ranging from E.M.Warburg Pincus and Energy Spectrum Partners to Southern EnergyCapital Group and Stratum Group LP, collectively counted assets ofUS$14.4 billion, including $9.9 billion looking for new homes. Mostalready had satisfying experiences of dabbling in Canada, across afull range of sectors from exploration and production to seismicsurveying and industrial catering.

In the collective view of Canada, chief investment officer JamesSpann from the Dallas office of Energy Spectrum Partners wastypical. The firm is a believer in Canadian gas: “It’s a solidstory…really it’s only just begun.” Spectrum just laid out C$26million (US$18 million) for a 57% stake in a new entry into gasgathering and processing, Canadian Midstream Services Ltd., whichhas quickly accumulated Alberta assets and expects to announce soona new acquisition on the drilling frontier in northeastern BritishColumbia. “We don’t think U.S. production is going to be there tomeet demand,” added Spann, whose firm also has interests in EastTexas gas processing and gathering.

Will Honeybourne, Houston managing director of First ReserveCorp., agreed “we see a lot of upside potential” in Canada aftergas export revenues achieved an annual growth rate of 20% asvolumes doubled and prices firmed in the 1990s.

The potential is for big and fast gains, in the calculations ofRaymond James senior analyst Wayne Andrews. From his desk inHouston, Andrews sums up the gas outlook with a famous phrase fromthe days of the space race: “Houston, we have a problem.”

Andrews’ charts of production data from state agencies suggestU.S. output dropped by 5.7% in 1999 to 41 Bcf/d from 43.5 Bcf theyear before. (He records declines of 6.4% to four Bcf daily inLouisiana, 2.5% to 4.4 Bcf in New Mexico, 14% to 3.9 Bcf inOklahoma, 5.5% to 15.1 Bcf in Texas and 4% to 13.6 Bcf infederally-managed offshore territory). Consistent with theproduction data, the Andrews charts also show a sharp decline insummer injections into gas storage to 1.66 Tcf in 1999 compared to2.08 Tcf in 1998 and a 1995-99 five-year average of 1.92 Tcf. Ifthe state production data stands up, Andrews expects the industryto enter the 2000-01 heating season with a November inventory of2.25 Tcf or 25% less gas in storage than last fall.

His figures suggest the market cannot count on Canadian gastaking off the pressure any time soon. While production shows nosigns of declining, there is also no reason to believe the oldsurplus “bubble” will return any time soon.

Andrews, echoing agencies such as the Canadian Gas PotentialCommittee, points to failures to increase volumes going into theNova gathering grid in Alberta much beyond 12.5 Bcf/d last yeardespite accelerated drilling. Firm prices are generating a shift inCanadian field activity, but it is expected to be some time beforethe new generation of higher-grade wells being drilled in the RockyMountain foothills and northern frontiers of Alberta and B.C. canmake up for a natural production decline rate that currentlyaverages about 25% per year in much cheaper, shallower southernwells.

In the Andrews calculations, the tightening supplies translateinto strong prices: US$2.40 per MMBtu by the end of March, up from$1.82 in the spring of 1999, then $3.50 in November compared to$2.65 last fall. At worst, if there are no cold snaps andproductivity comes in higher than expected, the scenarioanticipates prices of $2 this spring and $3.00 in the fall. Andrewsrefuses even to guess where prices will end up, saying only thatchanges will be just plain “BIG,” if productivity erodes furtherand the weather turns colder.

Gordon Jaremko, Calgary

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