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Canadian Exporters See Revenue Gain Leading to Supply Recovery

April 28, 2008
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Canadian natural gas exporters have recorded their first revenue gain in more than two years, prompting predictions that a drilling and supply recovery will develop within months. In the long-awaited turn for the better, sharply rising sales volumes more than made up for negative effects on prices and corporate incomes of unfavorable exchange rates, trade records of the National Energy Board (NEB) show.

Canadian pipeline deliveries to the United States rose 12% to 1 Tcf or an average 11 Bcf/d in the first quarter of the current gas sales year. The NEB meter continues to tracks the industry's traditional contract period of Nov. 1 through Oct. 31.

Export revenue rose by 3% to C$7.7 billion (US$7.5 billion) for the three months that ended Jan. 31, up C$200 million (US$196 million) from C$7.5 billion (US$7.35 billion) in the first quarter of the 2006-07 contract. Starting in January, the jump in sales volumes was large enough to make up for depressing price and revenue effects of the Canadian loonie's increased value against the U.S. dollar. When measured in American money, gas exports are turning in a stellar performance so far this contract year thanks to a combination of strong demand and firming prices.

First quarter revenue on international deliveries leaped 19% to US$7.8 billion, up $1.3 billion from US$6.5 billion in the November-January start of the 2006-07 contract. Heating season border prices averaged US$7.45/Mcf, up 6% from US$7.01 a year earlier.

For Canadians especially, gas has been left in the dust while oil emerged as a global financial asset dubbed "the new gold" by Cambridge Energy Research Associates. Canadian gas has attracted no counterpart to the lineup of "noncommercial" buyers of paper barrels in commodity exchanges' oil pits such as hedge or index funds, pension plans and university endowments.

Canadian gas export revenues leaped by C$8 billion (US$7.8 billion) or 32% to a peak C$33 billion (US$32.3 billion) in the 2004-05 contract year as Gulf of Mexico hurricanes damaged production facilities. But while oil kept on rising, annual gas export revenue dropped by C$5 billion (US$4.9 billion) or 15% to C$28 billion (US$2.7 billion) in 2006-07.

The encouraging start to the current contract period recorded by the NEB marked a lasting turn for the better for Alberta, suggest the latest forecasts by Canadian observers such as GLJ Petroleum Consultants, Peters & Co. and FirstEnergy Capital Corp.

All expect prices to recover this year to C$8 to $10 (US$7.84 to $9.80) or more per Mcf, a level that production firms say they need to justify starting an investment, drilling and employment revival.

Erosion of Canadian supplies is forecast to contribute to the firming, with the prolonged drilling slowdown since 2006 expected to reduce production capacity by as much as 1 Bcf daily or about 6% off former highs of 16-17 Bcf/d.

Alberta gas fields are increasingly expensive to exploit and the recently announced five-year extension of provincial royalty reductions for deep wells only helps the costliest, riskiest and most technically demanding drilling, the analysts say. But from the Canadian perspective long-range demand trends are also seen as favorable, led by increasing use of gas for electricity generation as coal and atomic power projects struggle to advance against environmental, safety and plant siting concerns.

Some of oil's financial glitter could also start rubbing off on natural gas, the Canadian analysts suggest. The new luster is foreseen as a side effect of spreading global trade in liquefied natural gas, including accelerating tanker traffic to new and expanded import terminals in Canada and the U.S.

A cold winter in Europe and strong Asian demand already helped firm up Alberta heating season export revenues by diverting tankers away from U.S. markets where big cargo landings depressed prices in 2006-07, the analysts say.

"Natural gas on a global basis today is very much where crude oil was nearly 40 years ago," FirstEnergy says in a new research report to investors.

In the late 1960s and early '70s oil was "a premium, highly desirable fuel that had been cheap for too long in some locations -- that is, in North America," the investment firm recalled. Oil "achieved a global higher-priced status thanks to a flexible transportation fleet that could move it easily around the globe, and the entry of North American consumers onto the global stage (as old mainstays led by Texas declined)."

"The time to remain more bullish than ever on natural gas prices is upon us," the FirstEnergy report said.

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