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Some in Canada See Turnaround Coming

Imports into the United States of Canadian natural gas tapered sharply last heating season. Records of the U.S. Department of Energy confirm earlier reports by Canada's National Energy Board (NEB) that the volume of trade contracted during the period fell when it normally peaks, at the same time that prices fell on glutted markets.

The latest quarterly report by the U.S. Office of Oil and Gas Global Security and Supply shows pipeline deliveries from Canada to the U.S. dropped by 11% in the first three months of this year to 928.3 Bcf from 1,044 Bcf during the same period of 2008. The average price fetched by Canadian gas at the international border dove by 38% to US$5.03/MMBtu in first quarter 2009 from US$8.13 a year earlier.

The smaller trade in liquefied natural gas (LNG) arriving overseas by tanker held up better. LNG imports into the U.S. in first quarter 2009 increased 14% to 86.4 Bcf from 75.7 Bcf a year earlier. The average price of LNG cargoes only sank by 23.5% to US$6.56/MMBtu last heating season from US$8.57/MMBtu in the first three months of 2008.

U.S. figures on the trade differ only in record keeping details from equally bleak Canadian status reports. While the U.S. agency tracks the traffic for calendar years, the NEB keeps score on the traditional gas contract year of Nov. 1 through Oct. 31.

In the Canadian gas supply heartland of Alberta, drilling remains all but suspended while most producers await developments and Calgary industry analysts engage in a lively debate over how long the trade contraction will last and prices will stay in the hardship range of US$3/MMBtu or less.

On the conservative side, the Peters & Co. energy investment house describes the outlook for gas prices during the forthcoming 2009-2010 winter as "poor at best." Canadian production shut-ins hit 300 MMcf/d by the end of August and there was a "strong likelihood" that the total taken off the market will hit 500 MMcf/d, Peters analysts calculated.

The bearish Canadian outlook anticipates a "swing sharply back in favor of higher natural gas prices in the second half of 2010," with a reviving economy and negative supply effects of the current drilling slump gradually easing the glut over the next 12 months. "We continue to expect the imbalance to remain in favor of supply until second half 2010, with a return to more normalized storage levels in Canada and the U.S. not expected until the fourth quarter of 2010." It is just conceivable -- but not now foreseeable -- that happy consumption, production and weather surprises might drive prices back above US$5/MMBtu before the onset of the 2010-2011 heating season, the Peters analysts said in an investment research note.

A much more bullish Canadian outlook -- articulated vigorously by FirstEnergy Capital Corp., formerly an equally definite bear -- said the market bottom is at hand and will be as short as only a few weeks. "Various factors such as falling supplies in the U.S. and Canada, improving demand and slower LNG imports contribute to our view for aggressive storage withdrawals this upcoming heating season."

FirstEnergy's analysts said potential stabilization of the economy and ever-present possibilities of cold snaps pose "upside risk to our already aggressive average natural gas price (for 2010) of US$7/MMBtu." The bullish outlook says prices are still vulnerable to further drops towards US$2 in the U.S. and as low as US$1 in Canada during September, before space heating demand returns and potential record storage withdrawals begin.

The prolonged drilling contraction in the Canadian industry will contribute to strong draws on inventories by taking 1 Bcf/d of supplies off the market this year and cutting production capacity by at least another 500 MMcf/d in 2010, FirstEnergy estimated. U.S. output is also seen as receding. "Despite all the hoopla and talk about shales and other unconventional gas, important as it is, it will simply be unable to make up for all of the losses that are occurring in conventional gas plays as a result of a U.S. gas drilling rig count that is sitting at its lowest levels since 2002," the Calgary market bulls predicted.

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