Canadian natural gas exports are holding firm -- and even managing to grow -- despite persistent, widespread forecasts of decline for the northern supply mainstay on the "continental" natural gas market.

With only a month left to count in the 2006-07 edition of the gas-trade year, the latest National Energy Board (NEB) data shows Canadian pipeline deliveries to the United States running up by 3.8%.

Exports for the 11 months ended Sept. 30 were 3.38 Tcf, up from 3.26 Tcf during the same period of the 2005-06 contract year, the NEB reported.

Canadian industry revenues from exports, while slipping because international border prices eroded faster than sales volumes grew, remained well inside the astronomical 11-digit range. Exports for the first 11 months of the 2006-07 contract term fetched US$23.26 billion, down 7% from US$25 billion for the same period a year earlier.

The NEB data highlighted a reality of the trade that is beyond the gas industry's control and has depressed producers, traders and investors in Canadian operations -- unfavorable currency exchange rates. The rise of the Canadian loonie against the American greenback effectively reduces prices and revenues received for exports (and domestic sales, since they likewise track North American trading). In the past year the Canadian currency has jumped in value from a trading range of US$0.80-0.90 all the way up to US$1.00-1.10.

Measured in Canadian dollars, 11-month export revenues in 2006-07 were down 9.4% to C$25.94 billion from C$28.62 billion. In American currency, export border prices over all but the last month of the 2006-07 contract year averaged US$6.83/MMBtu, down 10.1% from US$7.60 for the same period of 2005-06. In Canadian currency, the drop was 12.4% to C$7.10 per gigajoule from C$8.11 a GJ.

Authorities including the NEB and the Alberta Energy and Utilities Board have agreed for several years that a long-range decline in Canadian supplies is on the horizon as a matter of natural evolution because western gas fields are "mature" and bound to deplete. But a combination of flat prices, unfavorable currency trends, rising costs per unit of eroding production from old wells, reduced drilling and royalty increases planned by Alberta in 2009 continue to prompt gloomy predictions of imminent supply drops from Canadian industry analysts.

Total western Canadian gas production -- which goes about 55% to exports and 45% to domestic markets -- is down by a monthly average of 385 MMcf/d to 16.5 Bcf/d so far in calendar 2007, FirstEnergy Capital Corp. estimated in a research note.

"We still expect that 2008 and 2009 will see natural gas production declines well in excess of anything recorded for 2007, with cumulative additional production declines near 2 Bcf per day," said the Calgary investment house, which makes a specialty of tracking gas markets. The gloomy expectations appeared to be confirmed by announcements of the second round of annual drilling budget cuts by heavyweight producers such as EnCana Corp., Talisman Energy and Petro-Canada.

But FirstEnergy also acknowledged the surprisingly persistent strength of Canadian output and exports. "Although we have been stressing the inevitable declines in western Canadian natural gas production since mid-2006, when the first clear signs of a drilling downturn began, the extent of the declines over the past 18 months have been somewhat muted."

The resilience is credited to "high-grading" or concentrating on the best drilling prospects in Canadian producers' vast portfolios of mineral rights holdings, "tie-ins" to pipelines of wells completed before budget cuts, and just "better than expected seasonal swings in natural gas supply patterns."

By historical standards, the word slump for the current state of Canadian drilling is also an exaggeration. As of mid-December, the number of active drilling rigs working in western Canada was 469. That was down only 14% from 545 rigs in operation a year earlier.

Until gas prices and contractor investment in new equipment took off about six years ago, a western Canadian rig count of 469 was tantamount to full employment of a fleet that long hovered in the range of 500 units.

The word slump applies to the changed effects of even a modest activity reduction on a vastly expanded contractor fleet. The number of western Canadian rigs available for drilling has jumped to 876, which means that 469 active spells an employment rate of only 54%. For a fleet viewed by many as overbuilt, anything less than a 20,000-well year spells fierce competition for contracts and hard times in the western Canadian drilling sector.

Forecasts of a Canadian gas price recovery rely on suffering through a deep enough drop in activity for the elusive serious decline in supplies to happen.

"At some point, natural gas prices will firm up once again," FirstEnergy told investors. The drivers will be a tightening of North American supplies to a point where imports of liquefied natural gas cannot compensate for reduced Canadian exports. "This is still almost a year away...and western Canada natural gas production will bear almost all the burden of rebalancing the market until then," FirstEnergy predicted.

Rival investment house Peters & Co. is currently more optimistic. The firm agrees western Canadian production is in decline, and its count suggests volumes have dropped as low as 14.7 Bcf/d or 400 MMcf/d below production a year ago. The accumulating Canadian production decline from 2006 could hit 1.3 Bcf/d in 2008, by Peters estimates.

A tighter North American market is on the near horizon, Peters analysts suggest. Increased European prices have attracted increased tanker shipments of liquefied natural gas, lowering the volume of landings in the U.S. to 900 MMcf/d from a three-year early heating season average of 1.6 Bcf/d, the firm believes. "These factors suggest that any sustained period of cold weather across the continent will result in a sharp increase in natural gas prices," Peters told investors in Canadian energy stocks.

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