Although Canadian producers have been displaying theirtraditional optimism with expectations of steady growth in gasdeliverability and production, a new survey of 40 producers by theCanadian Energy Research Institute (CERI) shows that their capitalspending plans tell a different story.

“Basically what we’re calling for is continued tight markets. Iguess 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, producerspending on gas drilling actually is projected to drop by $700million in western Canada next year.

CERI’s survey shows spending is expected to fall to C$8.9billion next year from $9.6 billion in 2000. It is expected torebound in 2001 back to the $9.6 billion seen this year.Deliverability and production, meanwhile, are expected to makesmall gains. Deliverability is expected to grow to 18.4 Bcf/d nextyear 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 18Bcf/d in 2001 and 18.6 Bcf/d in 2002 from about 17.6 Bcf/d thisyear.

“The reason for [the projected reduction in gas spending] is theresurgence of oil drilling activity in western Canada,” saidMortensen. “In 1999, we were still having a collapse in oildrilling, and the field had been cleared for gas. Now, according tothese producers, they are coming back to more traditional levels ofoil spending so that is starting to mean that gas doesn’t get itall their way anymore.”

CERI’s ninth annual survey of Canadian producers was completedthis summer so some of the projections may have been based on lowergas prices, he said. In fact, producers were surprisinglyconservative in their price expectations in the survey, with anaverage projection of around C$2.50/Mcf for gas this year comparedto the $4.23 actually experienced to date in 2000. “Producers wereprobably being cautious after suffering through more than 10 yearssince deregulation with low prices interrupted by only brief upwardspikes,” said Mortensen.

As a result, CERI made an assumption that producers probablywill raise their spending on gas drilling during the latter part ofthis year. Despite the actual comments of producers in the survey,CERI upped its own forecast on gas spending by 18% in 2001 and2002. It is projecting C$10.6 billion in gas-directed spending nextyear 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 identifyingenough targets and getting enough equipment and personnel to drillthem,” said Mortensen. “We’re at record drilling levels now sowe’re running flat out. Last year, we had [a record] 7,000 gaswells completed in western Canada. This year we are expecting 8,400gas wells. So when we run this higher spending case, we get a levelof 10,000 gas well completions by 2002. In that case, spendingwould be about C$1.7 billion and higher in 2002 than it is now.”The existing personnel and equipment may not be able to supportthat level of activity, he said.

In addition, even if the increase comes to pass, the continuedfocus on shallow gas drilling could be the spoiler. If the industrywould just shift half of its effort from shallow gas to the higherproductivity areas in western Alberta, CERI estimated that a higherlevel of deliverability could be achieved while holding wellcompletions close to this year’s pace. However, CERI’s ownprojections on production show a slower pace of growth this yearthan the survey results show. CERI is expecting production to reachonly 16.8 Bcf/d this year compared to the survey’s 17.6 Bcf/d. CERIexpects gas production to increase to 17.5 Bcf/d next year and 18Bcf/d in 2002.

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

Rocco Canonica

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