The new international natural gas trade year is off to a brisk start amid predictions that 2008 will mark the start of a price recovery and possibly a drilling revival for Canadian producers.

Pipeline exports to the United States jumped by 11% to 308 Bcf last November from 277.6 Bcf in the first month of the 2006-07 contract year, show the latest National Energy Board (NEB) figures. Prices still looked poor in year-over-year comparisons, but the NEB record confirms that slippage was virtually all due to the rising value of the Canadian dollar to roughly par with its U.S. counterpart rather than gas market conditions.

Measured in the Canadian loonie, average export prices at the border dropped by 13.3% to C$6.50 per gigajoule last November from US$7.50 a year earlier. Monthly export revenues in Canadian funds were down by 4% to C$2.16 billion from C$2.25 billion.

But in American money border prices for Canadian gas last November rose by 1.8% to US$7.22/MMBtu from US$7.08 in the first month of the 2006-07 contract year. Monthly export revenues rose 12.5% to US$2.23 billion last November from US$1.98 billion in the opening month of the 2006-07 contract year.

The Canadian currency gained -- or the American dollar lost, depending on the observer's perspective -- as much as 20% over the period. For Canadian industries ranging from auto parts to gas the trend was uniformly bad. International competitive advantages were lost along with revenues, setting off setbacks ranging from factory closures to drilling slowdowns.

But in the gas sector at least, Canadian industry analysts are suggesting the worst of the currency shock is over and firming prices in now near-par dollars spell the beginnings of improvement.

"This winter may be the turning point for natural gas prices," Alberta energy shares specialty firm Peters & Co. said in a research report. A 2007 drop of 500 MMcf/d or more in Canadian supplies, due to drilling cutbacks, contributed to firming up the market along with high prices in European markets that attracted liquefied natural gas (LNG) tankers away from U.S. terminals, Peters said.

LNG behavior is now being factored into Canadian market and price forecasts as a result of growth in overseas gas deliveries to the U.S. and imminent growth in global trade capacity, including construction of Canadian coastal terminals chiefly for re-export to American markets.

Early 2008 prices in the chief Canadian producing province of Alberta rose into the range of C$7.50/MMBtu, up about 70 cents or more than 10% from a year ago.

The Canadian supply decline may have been as much as 840 MMcf/d, Alberta financial house FirstEnergy Capital Corp. added in an investment research note. "The pace of supply decline should now start to quicken" because restraint also prevails in 2008 producer drilling budgets and delayed effects of '07 cuts will continue to ripple through the industry, FirstEnergy added.

The activity slump could lop another 850 MMcf/d or 5% off Canadian production this year, FirstEnergy predicted. "We believe that Canadian natural gas exports are beginning to be affected and that the impact will become much more acute in 2008," the Alberta investment house wrote.

FirstEnergy uses different export information than the NEB and employs a "net export" yardstick that attempts to take into account re-exports of gas shipped to the U.S. back into Canada via pipelines such as the Vector system between Chicago and southern Ontario.

By its net export measurements, FirstEnergy calculates Canadian sales in the U.S. slipped to a daily average 8.92 Bcf/d last year from 9.06 Bcf/d in 2006. That and further declines this year are bound to help sow seeds of eventual international price increases, the firm suggests. "This [Canadian delivery decline] will clearly start to make an impact on the U.S. natural gas market with increases in U.S. domestic production expected to barely keep pace with Canadian import losses. The end result will be a steadily tightening market," liable to support a sustained price increase, FirstEnergy said.

Field activity continues to register effects of the past year of flat prices and the compounding impact of the currency change, show records of the Canadian Association of Oilwell Drilling Contractors (CAODC).

As of last week 593 drilling rigs were operating across western Canada, down mildly from 603 at the same time in 2007 but off sharply by 18% from the peak of 722 hit in mid-February 2006. The decline in gas activity may be greater because CAODC figures do not show the drilling targets of rigs. In 2006 industry analysts estimated that 75% of Canadian drilling was aimed at gas. The gas share of activity, while still a majority, is widely thought to have shrunk somewhat as the minority of producers with scarcer oil prospects in their land portfolios switch targets.

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