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Canadian Producers Approach Uncertain 2009

Canadian natural gas exporters are poised to chalk up a strong year of gains in both sales volumes and revenues, but doubts that the stellar performance will be repeated are spreading.

Pipeline deliveries to the United States rose by 1.2% to 3.43 Tcf in the first 11 months of the gas contract year ending Oct. 31 from 3.39 Tcf in the comparable period of 2006-2007, according to the latest trade figures from the National Energy Board (NEB). Export revenues climbed 19% to C$30.8 billion (US$30.5 billion) in November through September of 2007-2008 from C$25.9 billion (US$23.3 billion) in the first 11 months of the previous contract year.

Sharply improved prices fueled the revenue gain. At the international boundary, Canadian gas fetched an average US$8.85/MMBtu, C$8.35 per gigajoule (GJ) in the 11 months of November through September 2007-2008, up 29.7% from US$6.82/MMBtu, C$7.09/GJ, in the same period of 2006-2007.

Favorable currency exchange trends helped put a rosy tinge on the gas trade from the Canadian exporter point of view. The value of the loonie stopped rising last winter at about par with the American dollar. That ended erosion of export prices and revenues expressed in Canadian currency that darkened the picture in 2006-2007.

Then the loonie resumed falling for most of 2008, restoring about half of an export premium that reached as much as C40 cents through the 1980s and 1990s, when the Canadian dollar hovered in the range of US60 cents to US80 cents.

The loonie is widely traded as a petrodollar due to the prominence of oil as well as natural gas exports in Canadian exports and the national economy. The exchange rate has dropped back into a range of US78 cents-US79 cents and is widely expected to keep on dropping as oil prices continue the retreat that has lopped about 70% from July highs approaching US$150/bbl.

But the exchange rate-reinforced export gains are widely forecast to run out of gas, leaving flat to declining sales and revenues to fall short of sustaining a Canadian drilling revival that lasted through much of 2008. A drop in well completions of about 10% to 15% has been projected for 2009 by industry agencies such as the Petroleum Services Association of Canada and the Canadian Association of Oilwell Drilling Contractors. The lone bright spot in the outlook for field activity and supply development is the accelerating import of shale gas drilling technology from Texas, initially to northeastern British Columbia.

The spreading doubts are articulated by the latest research note from Calgary's FirstEnergy Capital Corp., which makes a specialty of tracking gas drilling, production and storage in western Canada. The investment house just lopped 12% off its 2009 gas price forecast, cutting its projected annual average to US$7/MMBtu from $8. In 2010 and 2011, a recovery is still expected to US$8.50 and $9.50, respectively.

"The simple fact of the matter is that unless North America, and the Northern Hemisphere in general, experience a normal to much colder-than-normal winter, there will be too much gas available and storage balances will remain at or well above average historic levels," FirstEnergy said (see related story).

The financial analysts point to supply growth in the U.S., led by unconventional gas and especially shale production, downside risks on the demand side of the market, and rising availability of liquefied natural gas to North America as economic recession deepens in Europe and Asia. "At this stage trying to get bullish on natural gas prices on the basis of weather alone is a recipe for sheer folly," FirstEnergy warned.

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