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Canadian Gas Export-to-U.S. Revenues Jump 33%

After scoring a streak of revenue gains on exports to the United States that account for a majority of their natural gas output, Canadian producers are drilling at a brisk pace and building a big inventory of fresh targets for further field development.

Pipeline deliveries to the U.S. fetched US$26 billion in the first 10 months of the contract year ending Oct. 31 -- a whopping 33% jump from US$19.5 billion for the same period of 2006-07, show the latest trade data collected by the National Energy Board (NEB).

Despite negative effects of unfavorable currency movements that all but eliminated former exchange rate premiums on all Canadian exports last winter, the revenue gain was also respectable when translated into loonies. Gas sales into the U.S. from last Nov. 1 through this July 31 of C$26 billion were up 18.3% from C$22 billion for the same 10-month period of 2006-07.

In the American buyers' currency, Canadian gas fetched an average US$9.05/MMBtu at the international boundary during the first 10 months of the current contract year - up 27% from US$7.10/MMBtu in the same period of 2006-07, the NEB record shows.

In loonies border prices were up 13% at an average C$8.47 per gigajoule (GJ) during last November through this July from C$7.47/GJ for the same period of 2006-07.

Export volumes for the 10-month period were also up despite a slow sales summer, rising 4.4% to 2.85 Tcf for the first 10 months of the current contract year from 2.73 Tcf during the same period of 2006-07. Up to 60% of total Canadian production, currently about 16.3 Bcf/d including 0.5 Bcf/d from Nova Scotia's Sable Offshore Energy Project, is exported to the U.S.

Canadian prices followed their American cousins into a trough during late summer and early fall, with trading at the benchmark AECO storage and trading hub in southeastern Alberta currently remaining stuck in a range of C$6.00-$6.50 per Mcf (US$5.04-$5.46).

The softness prompted FirstEnergy Capital Corp. to suggest a "downward trek" in Canadian productive capacity could develop over the next few months because "at current prices little in the way of new natural gas production is economic in western Canada."

But drilling rig activity estimates by the Calgary investment house suggest the industry is looking beyond the current financial woes in general and gas price trough in particular to better or at least more stable times ahead. As of this week the count of western Canadian rigs at work explicitly targeting gas - as opposed to oil or both commodities - was 255, up five from the previous week and up 43% from the 178 rigs at work on gas in mid-October of 2007.

The Canadian industry is also stockpiling a big inventory of fresh drilling targets with record spending at sales of mineral rights by the western provincial governments of British Columbia, Saskatchewan and Alberta, Peters & Co. calculates in a research note. The Calgary energy shares boutique's catalogue of auction results released by the governments documents C$4.1 billion (US$3.4 billion) in purchases of drilling rights across the region so far in 2008 -- or slightly more than double the value of provincial oil and gas rights sales for the same period of the previous best year, 2006.

British Columbia leads the pack with C$2.3 billion (US$1.9 billion) in drilling rights sales so far this year, with the industry accumulating big land spreads required for shale gas that is emerging as a top future drilling target thanks to provincial royalty incentives as well as technical advances.

Alberta trails at C$762.8 billion (US$640 million) in rights sales so far this year, up from C$600 million (US$504 million) for the same period of 2007.

The performance is a reversal from Alberta's customary leadership in Canadian oil and gas rights sales, as the province that traditionally accounts for about four-fifths of Canadian production and drilling. Financial analysts, still annoyed by a losing fight against Alberta royalty increases last year, blame the slippage on the province's decision to raise rates as of January, 2009. Alberta also has no counterpart to British Columbia's shale gas regime, which keeps royalties down to a nominal 2% until costs of drilling and developing production are fully covered. But government sources point out all concerned predicted the lull in rights auctions, that the industry holds multibillion-dollar inventories of Alberta gas rights bought before the highly politicized royalty debate, and that owners of the targets show no signs of giving them back to the province with demands for refunds.

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