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Canadian Gas Imports Trending Down

A steady decline in Canadian natural gas exports has entered its second year, show trade records kept by the National Energy Board (NEB).

Pipeline exports to the United States dropped by 11.5% to 922 Bcf in the first quarter of the contract year that started Nov. 1 from 1 Tcf in the same period of 2007-2008.

The depth of the drop is masked by gentler erosion of prices and revenues due to weakening of the Canadian dollar's value against its U.S. counterpart. Over the past year the loonie has dropped from about par to approximately US80 cents. The conversion rate closely tracks oil prices. Currency exchanges regard Canadian money as petrodollars due to the country's stature as one of the world's top 10 energy exporters, taking both oil and gas into account.

In U.S. currency, the average price fetched by Canadian gas exports at the border fell 15% to US$6.31/MMBtu in the first three months of the 2008-2009 contract year from US$7.43 in the same period of 2007-2008. But in the loonies that all but a handful of heavily international Canadian producers continue to measure their results by, there was no decline in the value of gas sales to the United States. The current contract year first quarter average export price rose 4.8% to C$7.22 per gigajoule from C$6.89 in the same period of 2007-2008.

In U.S. funds Canadian gas export revenues fell by 24.4% to US$5.87 billion during the first three months of the 2008-2009 contract year from US$7.77 billion in the opening quarter of 2007-2008.

But in loonies the 2008-2009 first-quarter gas export revenue erosion was only 6.9% to C$7.2 billion from C$7.73 billion in the same period of 2007-2008.

The latest heating season sales slippage continues a consistent trend of dropping pipeline exports that began in early 2008, NEB records show. By May of last year, the decline in Canadian deliveries to the United States hit 10.8% to 259 Bcf from 290 Bcf in the same month of 2007. Declines have occurred every month since then, at a varying rate in a range of 6% to 14% in year-to-year comparisons with 2007.

So far this contract year, the Canadian export slippage has been 5.5% down to 292 Bcf in November, 9.3% down to 617 Bcf in December and 11.5% down to 922 Bcf in January.

Canadian industry analysts see no imminent end to slow but steady erosion of gas trade with the United States. More than half of western Canadian production, and almost all of the output offshore of Nova Scotia, continues to be exported. But weakening demand caused by economic recession, coupled with rising American production led by shale gas development, are rated as only parts of the explanation for shrinkage of Canada's role as an international supplier.

The availability of Canadian supplies for international sales is shrinking as demand continues to rise for gas as industrial fuel at Alberta oilsands plants, which all use a variety of thermal production techniques. As commonly accepted industry rule of thumb, it takes about 1,000 cubic feet of gas to extract a barrel of usable oil in the Florida-sized northern bitumen belt.

Production topped 1.3 million b/d in 2008 and is headed toward 1.5 million b/d by the end of 2009, thanks to recent completion of construction on two jumbo plants plus continuing development of smaller projects begun before last year's oil price drop. Industry projections continue to foresee gradual but steady production growth towards 4 or 5 million barrels daily, with prices affecting the rate of increase rather than determination to take advantage of the largest reserves available anywhere to investor-owned oil companies.

At the same time, forecasters including the NEB and Alberta's Energy Resources Conservation Board say Canadian conventional gas production has peaked and entered a period of slow but steady declines of 2-3%/year. Unconventional development, including shale gas extraction, is spreading north. But the authorities are making no predictions about how fast or large the growth will be in prime target areas such as northern British Columbia, where the terrain and climate are far rougher than in U.S. shale production regions.

Analysts at FirstEnergy Capital Corp. predict "negative supply trends that took hold of western Canada in 2007 are set to continue until well into 2010."

The region's output dropped by 416 MMcf/d in 2007 and another 638 MMcf/d last year, the Calgary investment house estimates in a new research report. FirstEnergy predicts further declines of 750 MMcf/d this year and 250 MMcf/d in 2010 before unconventional drilling programs now getting under way have a chance to reverse the trend.

But the Canadian productivity decline will be too small to offset downward pressure on prices exerted by robust U.S. production and expanded capacity for liquefied natural gas (LNG) exports, including Canada's first LNG terminal in New Brunswick as well as U.S. and Mexican ports, FirstEnergy predicts. The financial analysts say gas price lows in hard times range around US$2/MMBtu are conceivable this year. FirstEnergy has cut its annual average price expectation by 10% to US$4.50/MMBtu for this year but still hopes for a rebound to US$7.75 in 2010, although the firm says it is reconsidering its long-term outlook in light of spreading shale gas development.

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