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CERI: Required Increases in Gas Spending Slow in Coming

CERI: Required Increases in Gas Spending Slow in Coming

Although Canadian producers have been displaying their traditional optimism with expectations of steady growth in gas deliverability and production, a new survey of 40 producers by the Canadian Energy Research Institute (CERI) shows that their capital spending plans tell a different story.

"Basically what we're calling for is continued tight markets. I guess there's no real surprise there," said Paul Mortensen, director of natural gas supply at CERI. What is surprising, according to Mortensen, is that despite higher gas prices, producer spending on gas drilling actually is projected to drop by $700 million in western Canada next year.

CERI's survey shows spending is expected to fall to C$8.9 billion next year from $9.6 billion in 2000. It is expected to rebound in 2001 back to the $9.6 billion seen this year. Deliverability and production, meanwhile, are expected to make small gains. Deliverability is expected to grow to 18.4 Bcf/d next year and to 19.1 Bcf/d in 2002 from about 18.1 Bcf/d this year. Production, according to the survey, is projected to grow to 18 Bcf/d in 2001 and 18.6 Bcf/d in 2002 from about 17.6 Bcf/d this year.

"The reason for [the projected reduction in gas spending] is the resurgence of oil drilling activity in western Canada," said Mortensen. "In 1999, we were still having a collapse in oil drilling, and the field had been cleared for gas. Now, according to these producers, they are coming back to more traditional levels of oil spending so that is starting to mean that gas doesn't get it all their way anymore."

CERI's ninth annual survey of Canadian producers was completed this summer so some of the projections may have been based on lower gas prices, he said. In fact, producers were surprisingly conservative in their price expectations in the survey, with an average projection of around C$2.50/Mcf for gas this year compared to the $4.23 actually experienced to date in 2000. "Producers were probably being cautious after suffering through more than 10 years since deregulation with low prices interrupted by only brief upward spikes," said Mortensen.

As a result, CERI made an assumption that producers probably will raise their spending on gas drilling during the latter part of this year. Despite the actual comments of producers in the survey, CERI upped its own forecast on gas spending by 18% in 2001 and 2002. It is projecting C$10.6 billion in gas-directed spending next year and C$11.3 billion in 2002.

Besides the tug-of-war between oil and gas spending, however, there is another constraint. "It was the difficulty in identifying enough targets and getting enough equipment and personnel to drill them," said Mortensen. "We're at record drilling levels now so we're running flat out. Last year, we had [a record] 7,000 gas wells completed in western Canada. This year we are expecting 8,400 gas wells. So when we run this higher spending case, we get a level of 10,000 gas well completions by 2002. In that case, spending would be about C$1.7 billion and higher in 2002 than it is now." The existing personnel and equipment may not be able to support that level of activity, he said.

In addition, even if the increase comes to pass, the continued focus on shallow gas drilling could be the spoiler. If the industry would just shift half of its effort from shallow gas to the higher productivity areas in western Alberta, CERI estimated that a higher level of deliverability could be achieved while holding well completions close to this year's pace. However, CERI's own projections on production show a slower pace of growth this year than the survey results show. CERI is expecting production to reach only 16.8 Bcf/d this year compared to the survey's 17.6 Bcf/d. CERI expects gas production to increase to 17.5 Bcf/d next year and 18 Bcf/d in 2002.

For a copy of the report contact Paul Mortensen at (403) 220-2388.

Rocco Canonica

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