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NEB: Economy, Other Factors To Soften Prices

Natural gas will trade in a moderate range of US$6.00-9.00/MMBtu this winter, Canada's National Energy Board (NEB) predicts in an annual heating season forecast.

"Assuming normal weather, natural gas prices are likely to remain disconnected from crude oil given the amount of additional domestic North American production being projected, and lower demand resulting from a slower U.S. economy," the outlook says. The NEB's commodities business unit expects total North American production to be 0.9 Bcf/d higher this heating season than in the October-March period of 2007-2008.

Output in the United States is forecast to be up by 1.3 Bcf/d, thanks to unconventional supplies, led by Texas shale gas; plus completion of the Rockies Express Pipeline, which has topped off markets with added flows from the Rocky Mountain region. Liquefied natural gas (LNG) imports to North America are expected to increase by an average 100 MMcf/d. The growth will be due partly to scheduled completion of the new Canaport import terminal beside Canada's biggest oil refinery, the Irving Oil plant in New Brunswick, and the associated Brunswick Pipeline for exporting regasified LNG to the northeastern U.S. via a connection to the Maritimes & Northeast Pipeline at the international boundary.

The North American supply increase of 1.4 Bcf/d from the U.S. and overseas will be partially offset by a projected decline in western Canadian output of 0.5 Bcf/d.

The slippage is due to anticipated continuation of slow but steady natural erosion of output from conventional gas fields, especially in Alberta, as old wells age and new ones only find progressively smaller deposits. The anticipated moderate prices are forecast to slow the low-cost shallow drilling that most Canadian producers have relied upon for more than 10 years to replenish supplies. More time is needed for the Canadian supply outlook to be materially affected by emerging trends of deeper drilling and adoption of U.S. shale gas production techniques, which is starting in northern British Columbia and at a slower rate in Alberta.

Total North American gas storage looks likely to be brim full at about 4 Tcf by the onset of seriously cold weather, the NEB says. The increasingly robust production outlook will make itself felt through the forthcoming heating season and into the next annual gas cycle, the board adds.

"With much higher U.S. production compared to previous years, we project that a lower level of LNG imports and a lower draw from storage may be required this winter. And given the projected loads, about 1.8 Tcf will remain in storage inventory at the end of March. This level is about 0.5 Tcf higher than last year."

As always, the NEB says cold snaps, oil spikes or supply disruptions have potential to drive up natural gas prices to heating season highs. But more forces are arrayed against gas climbing to double-digit heights and staying there for long, the board suggests.

"Factors that could contribute to softening gas prices this winter include: lower-than-expected consumption due to a slowing economy or weather, or higher supply from either greater-than-expected U.S. production or larger-than-projected LNG imports due to lower global demand. The effects of these would also be compounded by the high storage levels," the NEB says.

Oil prices are becoming increasingly difficult to predict due to political and financial influences on trading but appear likely to average US$50-75 a barrel if markets settle down, the NEB says.

Canadian electricity supplies, including export power loads, are forecast to be in a range of adequate to growing. Spare capacity will grow to the extent that central Canadian manufacturing -- which relies heavily on exports to the U.S., and especially the auto and pulp and paper industries -- slows in tandem with the economy south of the border.

Canadian power exports are already at their highest levels since 2000, the NEB reports. Domestic consumption is down in Ontario and Quebec, the two provinces with the largest U.S. power export connections. Water levels are high in Quebec's hydroelectric network, while newly built generating capacity is coming on-line in Ontario. Overhauls are also being completed at nuclear power installations in New Brunswick, Quebec and Ontario, resulting in predictable additions to eastern power supplies over the next four years.

In much of western Canada power supplies are tight, but outside of British Columbia the region has few or no international electricity trading connections. Supplies are most strained in Alberta, where surging industrial growth has overtaken long-distance power transmission capacity. The wires network has not been significantly expanded for 20 years and new projects remain hampered by resistance against carving new rights-of-way across growing country residential, recreational and retirement communities.

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