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Canadian Exports and Drilling on the Rise

Canadian natural gas exporters are chalking up double-digit revenue gains and plowing money into increased drilling.

Pipeline deliveries to the United States fetched US$22.6 billion in the first eight months of the current gas contract year ending Oct. 31, up 29% from US$17.4 billion during the comparable period of Nov. 1 through June 30 in 2006-2007, the National Energy Board's (NEB) latest trade data shows.

Exporters also got to keep double-digit gains after converting sales into Canadian funds, thanks to stabilization of the exchange rate since spring. That stopped a long slide in the returns on U.S. deliveries as the U.S. dollar lost value against other currencies, including the loonie, during previous years. The currency trend amplified effects of weakened prices on the continental gas market during 2006 and 2007.

After peaking at about US$1.02 last winter, the Canadian dollar has settled down into the vicinity of US94 cents. Until two years ago the loonie hovered in a range of US60-70 cents, which meant exporters received C$1.30-1.40 for every American dollar fetched by Canadian gas.

In their own currency Canadian gas exporters scored a 14% revenue gain to C$22.6 billion for November through June of 2007-2008 compared to C$19.9 billion in the same period a year earlier. In U.S. money, average gas prices at the international boundary jumped 22% to US$8.74/MMBtu in November-June of 2007-2008 from US$7.18 during the same period a year earlier. In loonies the improvement was 7% to C$8.17 per gigajoule from C$7.62.

The results include a substantial increase in drilling. As of the week ending Sept. 19, 474 rigs were out on the job in Western Canada, a 32% improvement on 360 active in mid-September of 2007. Field activity has been accelerating since spring.

Exports are a driving factor. Up to 60% of Canadian gas production goes to the United States. About four-fifths of the drilling is still in Alberta. The industry's traditional mainstay supply jurisdiction also continues to account for about 80% of Canadian production. But analysts such as FirstEnergy Capital Corp. suspect a change is developing with potential to redraw the production and trade map over time.

The Calgary investment house, echoing industry participants such as TransCanada PipeLines, observes that the quality of Canadian gas activity is improving and suggests that the greatest gains are occurring in British Columbia (BC).

"Well productivity is seeing a modest but welcome renaissance," FirstEnergy said in a research note. "Western Canada natural gas well initial production rates have been showing a gradual improvement in the past two years," with the revival owed "to less emphasis on high-decline shallow gas wells and a growing emphasis on higher-productivity deeper gas wells."

The most pronounced change is in BC, where first flows from new wells have risen to an average of nearly 1 MMcf/d so far this year. Productivity bottomed out in 2006 at an average of 640 Mcf/d.

BC output appears to be on its way back up toward its peak per new well of 1.6 MMcf/c per well set in 1993, when the Canadian industry was still making its first discoveries of the biggest, most easily produced drilling targets on its "near frontier."

Across the Canadian West the industry has also put a stop to supply deterioration as measured by another barometer of operational success, the decline rate or pace of annual well output reductions as reserves are produced.

In the 1990s and the early years of this decade the Western Canadian average gas well production decline rate nearly doubled to about 22% from the 12% area. Since 2004 the gradual acceleration of average annual well productivity decline rates has halted, partially reversed and stabilized in the 21% area.

Continuing improvements in both initial well productivity and annual reserves depletion are forecast as producers begin disclosing results of new shale-gas drilling technology transplanted to northeastern BC from Texas.

Sales increased to all but one of the major destinations for Canadian gas exports during the first eight months of the current contract year. Pipeline deliveries rose 20% to 354 Bcf in California, 14% to 1.1 Tcf in the U.S. Midwest, and 6% to 314 Bcf in the Pacific Northwest. Shipments to the U.S. Northeast dipped by 7.4% to 796 Bcf.

During the eight months ending June 30, U.S. dollar prices fetched by Canadian gas exports rose 14% in California to US$7.74/MMBtu, 22% to US$8.68 in the Midwest, 29% to US$8.64 in the Pacific Northwest and 23% to US$9.31 in the U.S. Northeast.

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