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Data Show Canadian Gas Exports Spiraling Downward

Canadian natural gas exports to the United States fell by 13% in the first two-thirds of the current international contract year ending Oct. 31. In combination with a 43% drop in border prices, the decline cut export revenues in half, according to the National Energy Board (NEB).

The latest data compiled by the NEB paints a bleak picture of a formerly thriving trade stalling and falling into a downward spiral. In the eight months from November 2008 through June, Canadian deliveries to the United States dropped to 2.23 Tcf from 2.57 Tcf in the same period a year earlier. The average price fetched by Canadian gas at the border deteriorated by 43% to US$4.95/MMBtu in November-June of 2008-2009 from US$8.74/MMBtu in the first eight months of the 2007-08 contract year. Export revenues plunged by 51% to US$11.14 billion in November-June of 2008-2009 from US$22.57 billion in the same period of 2007-2008.

The export decay is a critical factor in a Canadian supply decline recorded by a special NEB report earlier this month on the state of the gas industry and the outlook for the next two years as a result of a steep decline in investment and field activity that has cut drilling in half.

More than half of Canadian gas production is exported, making operations north of the border intimately connected with U.S. economic conditions. The NEB calculated that Canadian deliverability has slumped into a period of steep decline by an annual average of 9% that will likely take 2.7 Bcf/d off the continental market as of 2011.

FirstEnergy Capital Corp., conveying the Canadian industry mood in research notes to investors, has called the supply erosion an unprecedented Canadian supply "collapse" -- but one with at least a potential "silver lining."

The Calgary investment house maintains commodity markets are seriously underestimating the international scale of the Canadian gas supply erosion by keeping prices at severe lows in an industry hardship range of US$3-4/MMBtu, and are thereby setting the stage for a surprise rebound toward the US$7-8 range needed to light a fire under drilling as early as the first quarter of 2010.

"This Canadian supply story is simply not getting through to many on the Street [commodity futures and stock exchanges] in terms of its magnitude and duration," FirstEnergy said. "The declines we have seen and are contemplating for western Canadian natural gas production are far greater than many realize and this will make a difference in shifting gas balances for North America over the coming heating season, in combination with declining U.S. supply and modestly improving natural gas demand."

In less dramatic language, the NEB's revised forecast suggests that Canadian supply erosion story could be bigger than FirstEnergy said. The board pointed out that Canadian supplies on the continental gas market will shrink by an additional 0.7 Bcf/d as of 2011 due to increased consumption by thermal oilsands projects in Alberta. The national agency's Canadian industrial gas demand outlook is supported by Alberta's Energy Resources Conservation Board (ERCB).

At an industry conference in the provincial capital of Edmonton, ERCB member Jim Dilay affirmed that healthy oil prices, favorable trends of falling materials and labor costs, and declared industry intentions to advance projects into construction support a forecast of robust oilsands production growth. The ERCB is standing by a projection that Alberta bitumen belt production, using an average of about 1 MMBtu of gas per barrel of oil output, will triple to 3 million b/d as of 2018.

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