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Canadian Exports Founder on Economy, Oversupply

Canadian natural gas exporters are taking a beating. Volumes fell by 17%, prices tumbled 68% and revenues plunged 74% in May, according to the latest trade records kept by the National Energy Board (NEB).

Pipeline deliveries to the United States were 215.6 Bcf in May compared to 259.2 Bcf a year earlier. The average May price fetched at the international boundary by Canadian gas was US$3.42/MMBtu this year compared to US$10.81/MMBtu in the same month of 2008. Revenues in May were US$744.6 million compared to US$2.8 billion a year earlier.

The grim showing continued an ever-steeper slide by Canadian exports that NEB records show began in mid-2008. From NEB staff to financial analysts, Canadian gas specialists blame the plunge on an international market glut caused by the economic recession drying up demand, the rapid growth in supplies that are a result of previous drilling rushes to chase bygone high prices, and shale gas production breakthroughs.

The main disagreement north of the border is over when the market will take its next turn back up. Wary regulatory agencies and battered producers have largely stopped making predictions. Out in the gas fields a handful of optimists such as Precision Drilling Trust, which operates throughout North America, predict the current severe contraction of field activity will let demand catch up to supply in the forthcoming 2009-2010 heating season.

But Canada's oldest rig contractor -- privately-owned Beaver Drilling, a survivor of industry cycles since 1965 -- calls shale production a true "game-changer." The elder firm suspects that it will take two to three years for the international market to be tightened by a combination of reviving demand, environmental policy-induced fuel-switching to gas and natural erosion of aging conventional production.

The NEB's latest trade records, meanwhile, confirm that Canadian gas exports are in a rut of shrinking that reverses the previous long-range growth trend stretching back to the mid-1980s onset of energy deregulation and free trade.

In the first seven months of the current gas contract year ending Oct. 31, Canadian pipeline deliveries to the United States dropped 13% to 2.002 Tcf from 2.29 Tcf during the comparable period of November through May in 2007-2008. Border prices fell 40% to US$5.12/MMBtu from US$8.49/MMBtu. Export revenues shrank by 47% to US$10.3 billion from US$19.6 billion.

The international gas traffic slowed in three of the four main regional destinations for Canadian exports.

In the November-May period, pipeline deliveries to California fell 16% to 553.2 Bcf and prices dropped 39% to US$4.86/MMBtu. Exports to the U.S. Midwest declined 15% to 844.8 Bcf and prices lost 40% to US$5.02/MMBtu. Canadian sales into the U.S. Northeast dropped 16% to 597.7 Bcf and prices fell 38% to US$5.51/MMBtu. Only the Pacific Northwest bucked the volume trend as Canadian deliveries to the region rose 6% to 303.3 Bcf, but prices there dropped 42% to US$4.88/MMBtu.

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