Exports to the United States are holding firm as Canadian producers steadily accelerate natural gas drilling to compensate for anticipated depletion of aging reserves.

Slippage in Canadian pipeline deliveries to the U.S. was held down to a marginal 1.2% during the first eight months of the current gas sales contract year ending Oct. 31, the National Energy Board reports.

Export volumes during Nov. 1, 2003, through June 30, 2004, were 6.74 Tcf compared to 6.82 Tcf during the first two-thirds of the previous contract year, NEB records show. The volume performance held up for eight months despite adverse pricing conditions at the international border.

In U.S. currency, prices fetched by Canadian gas at the boundary were up a marginal 3.5% to US$5.29 per MMBtu during the first two-thirds of the current contract year compared to US$5.11 during the comparable period of 2002-03. But translated into Canadian currency as its value rose against the American dollar, average gas export prices fell 7% to C$6.56 from C$7.06.

The slight slippage in delivery volumes combined with the greater change in the exchange rate to cut pipeline export revenues in Canadian dollars by 8% to C$16.9 billion for the first two-thirds of the current contract year from C$18.3 billion during the same period of the previous term.

By historical standards, Canadian industry veterans point out that gas market conditions remain robust. Only a decade ago, with surplus supplies fighting for access to limited space on pipelines, prices of C$3 or better were still only a gleam in the eye of transporters and producers struggling to piece together projects to increase delivery capacity.

Deliveries continue to grow, albeit at a reduced pace, in the prime destination for the Canadian export pipeline expansions of the late 1990s. Shipments to the U.S. Middle West were up 1.5% during the first two-thirds of the current gas contract year to 1.087 Tcf compared to 1.072 Tcf during the same period of the previous term.

Slight slippage showed in deliveries to the previous favorite target market of Canadian exporters. Shipments to California in the first two-thirds of the current contract term were off by 1% at 300 Bcf from 303 Bcf during the same period a year earlier.

The sharpest drop in deliveries was experienced in the U.S. Northeast, where Canadian exports were off by 7.4% at 713 Bcf during Nov. 1, 2003 through June 30, 2004, compared to 770 Bcf for the same period a year earlier. Deliveries to the U.S. Northeast continued their long record of fetching the highest prices: US$5.70 per MMBtu during the first eight months of the current contract year compared to US$5.04 for sales to California, US$5.26 for the Middle West and US$4.57 for the Pacific Northwest.

Industry sources blame the drop in deliveries to the U.S. Northeast on a range of factors, including drilling and reserves disappointments offshore of Nova Scotia that have failed to top up volumes available to the Sable Offshore Energy Project and Maritimes & Northeast Pipeline, and rising demand for gas on markets closer to Canada’s principal gas fields in its western provinces.

In the old western mainstays, drilling is headed for a record despite a slowed pace of activity caused by a wet summer that has limited movements of heavy equipment, especially in Alberta, still the source for about 80% of Canadian production.

So far this year, the industry has drilled about 14,600 wells or 3% more than the 14,200 recorded for the first eight months of calendar 2003.

A notable increase in exploration drilling is under way. On western Canada’s “near frontier” in northeastern British Columbia, the number of wells drilled so far this year is up by about 34%. But by volume, activity continues to concentrate on a low-cost harvest of shallow reserves with quick wells as producers compete to demonstrate efficiency and score gains in share prices. The increased number of B.C. wells so far this year was still only 980 or well under one-tenth of the Canadian total.

The reason for the heavy concentration on Alberta plains gas reserves shows clearly in the latest well cost survey by the Petroleum Services Association of Canada, an annual report accepted by the industry and regulators as a sure measure of industry conditions.

In the most rugged exploration areas of B.C., PSAC found wells drilled and completed to a depth of about 16,000 feet took about 160 days and cost C$8.3 million (US$6.3 million). Access roads and well site preparation for a remote B.C. gas well alone cost C$458,000 (US$345,000).

Out on the plains of southeastern Alberta, PSAC reported wells are being drilled and completed to a depth of about 1,600 feet within sight of paved highways in 42 hours for as little as C$177,000 (US$126,000). The shallow gas harvest harnesses a new generation of coiled-tubing equipment that works like a dentist’s drill and can be adapted to a wide range of engineering innovations such as directional or horizontal wells using controlled pressure techniques that avoid damaging delicate geological formations. Advanced forms of the technology are being deployed for a developing wave of coalbed methane production.

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