The Canadian natural-gas community sees potentially sharp priceincreases developing on its horizon, thanks to a happy coincidenceof pipeline expansions and economic conditions on the supply side.As the Alliance Pipeline accepted its final certificate for itsU.S. leg from the Federal Energy Regulatory Commission, risingprices were being predicted by prominent fixtures ranging fromPeters &amp Co., an investment boutique specializing in energystocks, to the dean of Canadian geological and engineeringconsulting houses, Sproule Associates.

The projections hold that price increases will start long beforeAlliance’s scheduled in-service date, which remains postponed ayear until Nov. 1, 2000, due to regulatory conflicts last winterand spring before the National Energy Board. Canadian approval isexpected soon, following the recent completion of the environmentalside of the Alliance case north of the border.

The price scenario, which is rapidly becoming a consensusforecast in Canada, rests on two observations. One, gas pipelinecapacity will start increasing this fall, when expansions of theTransCanada and Foothills-Northern Border systems will add about1.2 Bcf/d to Canadian export capacity into the United States. Andtwo, the added pull on production capacity comes at a time whenproducers are too weakened by soft oil prices to accelerate gasdrilling enough for a recurrence any time soon of the standardCanadian event so far in the 1990s – rapid increases indeliverability to surplus levels again.

The Sproule organization, which provides the supply-sidesupporting testimony for TransCanada expansion applications,expects a thorough grilling when the NEB opens hearings next monthon a proposal for adding TransCanada facilities in 1999.Regulators, and shippers concerned over the potential toll effectof overbuilding the pipeline grid, are expected to probe theoutlook for Canadian productive capacity much more thoroughly thanusual.

The emerging questions are not whether Canada has the resourceendowment to keep up with the pipeline grid or even whether today’sgas prices make raising production economic. The answer to boththose questions remains a resounding yes, from authoritiesincluding the Alberta Energy and Utilities Board. The problem iswhether a production industry that focused heavily on oil for thepast two years, when its prices were high and gas pipeline capacitywas limited, now has the money to switch commodities.

The Peters investment house, which has a forecasting trackrecord widely accepted as one of Canada’s best, portrays gasproducers as scrambling to keep up. Virtually all back pipelineadditions. But most, except for a handful of almost pure gasproducers such as Canadian 88 Energy, face “constrained” drillingbudgets due to poor oil prices. In a new review of the state offield work, Peters says that so far this year, “natural gasdrilling in Canada has failed to materially increasedeliverability.”

The securities firm predicts that after slipping nearly 30%, theoil price will average US$14.50 per barrel this year and stay softat $15 in 1999, generating “a profoundly negative impact onindustry cash flow.” As a result, total western Canadian drillingactivity could slip by nearly 40% to 10,300 well completions thisyear and erode further in 1999 to 9,000 completions.

Gas completions are weakened along with oil in this scenario.Aggressive programs of expensive deep drilling continue in theprolific Rocky Mountain foothills of Alberta and northeasternBritish Columbia among strong producers such as Amoco Canada. Butthose are in the minority. Overall, the Peters firm observes that”cost-sensitive producers are electing to consider natural gasdevelopments judiciously close to existing infrastructure, and inmany cases opting for well recompletions instead of new wells.” Inthe longer term, “natural gas fundamentals for the Canadian basinare strong” and guaranteed eventually to generate acceleratingfield development. But “in the interim, producers will maximize theuse of existing facilities, often pushing equipment specifications,and opt for rental compression in lieu of large one-time capitaloutlays involved in facilities expansion.”

Gordon Jaremko, Calgary

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