Canadian natural gas exports defied consensus forecasts by increasing in the last international trading year (see NGI, Dec. 17, 2007), prompting the nation's top pipeline to suggest that the true trend is a change in the quality of production instead of its quantity.

The National Energy Board's (NEB) latest record shows that despite a drilling slump across the Canadian West, pipeline deliveries to the United States rose to 3.698 Tcf in the contract year that ended last Oct. 31, up 3.8% from 3.562 Tcf in 2005-06.

Widely noted slippage in the total number of wells drilled may not translate into erosion of production after all, TransCanada CEO Hal Kvisle said. The casualty of last year's flat U.S. prices -- which became Canadian declines due to a rise in the loonie's value against the American greenback -- appears to have been marginal field activity that only worked during the Gulf of Mexico hurricane spike into the area of US$15/MMBtu, he said.

Most of the losses as the Western Canada annual well count fell by about one-third into its current projected area of 15,000 were drilling for low-production volumes from coal seams and shallow sandstone in southern Alberta and Saskatchewan, Kvisle said.

Attention has shifted to costlier but much larger targets, with costs spread over higher production volumes, along the foothills of the Rocky Mountains in Alberta and northeastern British Columbia, said the TransCanada president, a production company executive before he switched into pipelines. The western side of the Western Canadian Sedimentary Basin, while requiring greater investment and technical skill, remains a fertile supply source, Kvisle said.

A year after the onset of a drilling slump that cut employment of the Western Canada rig fleet into the 25% area last spring, gas supplies in the region remain in a condition bordering on glut. Although the activity drop cut field contractors' prices, the industry suffers from "oversupply conditions," FirstEnergy Capital Corp. said in a new-year research note to investors.

The investment house still belongs to a Canadian chorus predicting production declines, estimating that output dropped by 420 MMcf/d in 2007 and forecasting a loss of 1 Bcf/d this year. But a recovery, forecast a year ago to be under way by now because it was thought supply declines would swiftly light a fire under prices, is currently projected to take until 2009 to begin.

Erosion of contractor fees and profits has cut prices required for a revival in the kind of drilling that set industry records in 2005 and 2006 into the area of C$7.25/Mcf, FirstEnergy calculated. "Unfortunately the rising Canadian dollar and a meltdown in natural gas supply due to oversupply conditions have offset any gains made from a reduction in field service costs," the financial analysts lamented.

The NEB's records paint a portrait of modest but measurable Canadian supply growth on the continental gas market, despite an offsetting estimated increase in consumption by thermal oilsands projects by as much as 20% to 1.2 Bcf/d on top of the well count slippage.

Pipeline deliveries grew or held steady in the last contract year to a majority of U.S. destinations served by significant export volumes.

Canadian shipments to the northeastern U.S. climbed 8.1% to 1.291 Tcf in the 12 months ending last Oct. 31 from 1.194 Tcf in the 2005-06 trading year. Exports to the U.S. Pacific Northwest shot up 24.2% to 473.5 Bcf in the 2006-07 contract year from 381.2 Bcf during the preceding 12 months. Volumes dispatched to California slipped by 4.7% to 434.5 Bcf in 2006-07 from 456 Bcf the year before.

But in the top export destination, the U.S. Midwest, Canadian deliveries retreated by only a marginal 1.4% to 1.492 Tcf in the last contract year from 1.513 Tcf in 2005-06. Measured in American currency, overall average border prices for Canadian gas exports slipped by 7.8% to US$6.79 in 2006-07 from US$7.36 for the preceding contract year. Total export revenues slipped 4.5% to US$25.256 billion from US$26.454 billion.

The money side looked much worse when measured in Canadian currency, thanks to the rise in its value from about US$0.80 to par with the American dollar and at times even higher. In their own currency Canadian exporters suffered an 11% border price setback last year to C$6.99 per gigajoule from C$7.85 in the 2005-06 trading year. Total export revenues weakened by 7.8% to C$27.887 billion from C$30.259 billion.

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