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Canada to Profit From Long-Lived Reserves, Propitious LNG Timing, Analysts Predict

Canadian industry is banking cash and goodwill to be ready for swift action when natural gas and oil markets pull out of their lows, a Calgary convention of earth scientists heard this week.

On the liquefied natural gas (LNG) export side, Late-mover Canadian projects are expected to miss the initial glut and market downturn and come in on the second wave.

Despite poor commodity prices and gloomy forecasts, fundraising by Alberta-based exploration and production companies in first quarter 2015 nearly tied the happier period one year ago, according to a scorecard kept by ARC Financial Corp.

"Already in 2015, investors have put C$5 billion (US$4 billion) of debt and equity into the space," said the Calgary investment bank, which maintains a close relationship with the Canadian Association of Petroleum Producers (CAPP).

"Part of the buy low-sell high investor psyche is the recognition that such dire, bottom- of-the-market industry conditions can’t last. Another factor is the safe, politically stable investment opportunity Canada offers. For now, companies are husbanding their newly raised debt and equity to weather the weak fiscal pulse."

The time to put the stockpiled capital to work could start as early as late this year, ARC Vice President Jackie Forrest told GeoConvention 2015, an annual assembly held by professional societies of geologists and geophysicists.

Forrest pointed to a difference between Canadian and American contributions to current supply gluts, especially in oil and liquid byproducts of gas.

Canadian production growth relies heavily on mostly slow development of factory-like, long-lived installations led by oilsands plants, tapping reserves measured in billions of barrels at output rates that last decades before sliding into gradual decline.

In the United States, far faster output gains are achieved with horizontal drilling and hydraulic fracturing. But a treadmill pattern of swiftly producing reserves has developed to cover costs of the advanced technology, Forrest said.

ARC estimates output from the high-tech wells typically declines by 80% during the first year of their lives. Each year only one well of every five represents production growth while four just maintain the previous year’s output, Forrest said. As a result, cuts in U.S. field activity due to low commodity prices are expected to show up rapidly as flat to declining production.

Since natural gas is much more abundant and demand growth is slow, its recovery is bound to lag oil, Forrest said. With storage facilities full and shale output still growing, notably from the Marcellus in the northeastern United States, "the next couple of years are very challenging for natural gas," Forrest said.

Anthony Yuen, a Citigroup global energy strategist, suggested that Canada is developing a "late-mover advantage," especially in the marathon race to enter international markets for liquefied natural gas (LNG).

Faster U.S. tanker terminal projects are well ahead of Canadian rivals in starting construction and deliveries, but the speed means having to endure an initial lean spell in flat or even depressed global LNG market conditions, Yuen said.

Slower development puts Canadian-made LNG, especially in northern British Columbia, potentially on schedule to be ready to go to market in time to ride the next wave of demand growth and price improvements.

"In BC we see strong momentum," supported by "stakeholders" from Aboriginal communities signing benefits agreements to federal and provincial governments crafting favorable tax, royalty and regulatory regimes, Yuen said.

He pointed out that the 18 Pacific Coast LNG terminal projects lined up for export licenses from the National Energy Board include two Oregon sites able to hold costs down by using established export pipelines from BC to the U.S. Pacific Northwest.

The earth sciences convention coincided with an Alberta election, which threw a scare into corporate and financial executive suites by replacing a 44-year-old Conservative regime with the province’s first government led by the left-leaning New Democrats (ND). Oil and gas share prices dipped, and industry executives called for speedy clarification of the new regime’s intentions.

Premier-elect Rachel Notley, an Edmonton lawyer well known to be a pragmatist, immediately assured the captains of industry. "Things are going to be just A-OK over here in Alberta," Notley said.

The NDs’ most radical economic proposals to date are a two-point corporate tax increase to 12% for all industries and a review of provincial oil and gas royalties. The defeated Alberta political right wing, backed by outspoken business leaders, demanded a swift conclusion to the review -- or no review at all -- in order to prevent capital flight from Alberta. Notley pledged to meet and listen to industry representatives.

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