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United States-Canada Gas Trade Erodes Further

Erosion of international natural gas trade continued as the 2008-2009 heating season opened, with a 5.5% drop in Canadian exports. Pipeline deliveries to the United States dipped to 292 Bcf last November from 309 Bcf in the first month of the 2007-2008 heating season and contract year, according to records kept by the National Energy Board.

Canadian industry participants and analysts blamed the slippage on moderate weather, increased U.S. production capacity and contraction of the overall economy undermining industrial gas consumption especially. Sales volumes declined in all but one destination region for Canadian exports. The lone gainer was the northeastern U.S., where November 2008 sales rose 4% to 90.1 Bcf from 86.4 Bcf in the same month of 2007.

Exports to California dropped by 18% to 34 Bcf in the first month of the current heating season and contract year from 41.4 Bcf in November 2007. Canadian deliveries to the midwestern U.S. dipped 6.5% to 130.7 Bcf in November 2008 from 139.8 Bcf in the same month a year earlier. November exports to the U.S. Pacific-Northwest dropped by 9% to 36.9 Bcf from 40.7 Bcf a year earlier.

The decline in export volumes last fall continued a trend that set in during spring 2008. Total pipeline deliveries volumes to the U.S. rose by only a marginal 0.1% to 3.708 Tcf in the 2007-2008 contract year from 3.703 Tcf in 2006-2007.

The NEB's monthly trade surveys show that by last May, the decline in export volumes hit 10.8% to 259 Bcf from 290 Bcf in the same month of 2007. The monthly slippage was 6% in June (to 274 Bcf from 291 Bcf), 9% in July (to 288 Bcf from 318 Bcf), 14% in August (to 291 Bcf from 338 Bcf), 11% in September (to 280 Bcf from 316 Bcf) and 11% again last October (to 278 Bcf from 313 Bcf).

But by a gas trade counterpart to boxers being saved by the bell, a favorable exchange rate trend kept Canadian exporters in the money for at least the first month of the current contract year.

On international currency markets, the loonie is perceived as a petrodollar and moves with oil prices. The oil collapse last fall knocked about one-fifth off the value of the Canadian dollar, down to about US$0.80. For exporters, the result was a 20% increase in the loonie value of their gas, which more than offset the drop in sales volumes.

Canadian gas export revenues, expressed in their domestic currency, rose by 7.3% to C$2.31 billion last November from C$2.15 billion in the same month a year earlier. Canadian-dollar prices fetched at the international boundary were up 13.3% to C$7.33 per gigajoule (GJ) in the first month of the 2008-2009 heating season and contract year from C$6.47/GJ in November 2007.

In the money of the importing country, spending on Canadian gas dropped by 14.8% to US$1.89 billion last November from US$2.23 billion a year earlier. American-dollar prices for Canadian supplies at the border slipped by 10% to US$6.45/MMBtu in the first month of the current heating season and contract year from US$7.17/MMBtu in November 2007.

Apart from the favorable currency exchange trend, the fundamental supply and demand conditions on the international gas market are increasingly raising concerns that Canadian producers are headed into a rough year.

A barometer of market trends -- gas in Canadian storage -- is showing signs that there is "potential to be a severe problem," FirstEnergy Capital Corp. warns in a research note. "The potential for a very real and large storage overhang in western Canada is growing with each passing day, setting up conditions for soft pricing once the heating season comes to an end and the storage injection season gets under way."

As of January the Calgary investment house, which makes a specialty of tracking gas market conditions, estimates that there was about 335 Bcf in western Canadian storage facilities. That is well above the previous January high of 304 Bcf set in 2007 and far in excess of volumes in storage during the last Canadian price and drilling activity peaks. In January 2005 gas in western Canada storage was 177 Bcf, and the total was only 130 Bcf in 2004 and 129 Bcf in 2003.

"With North American natural gas markets looking at generally healthy storage levels across the continent, and record high storage in western Canada, the outlook for prices in 2009 remains one of weakness," FirstEnergy warns.

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