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U.S. Market Less Attractive to Canadian Gas

Canadian natural gas exporters are off to a weak start on the new international contract year as volumes, prices and revenues continue the trade's slide in its last 12-month period ending Oct. 31.

Pipeline deliveries to the United States last November shrank by 13% to 256.2 Bcf from 293.8 Bcf in the same month of 2008, according to the latest trade scorecard from the National Energy Board.

The average price fetched by Canadian gas at the international border dropped by 31% to US$4.47/MMBtu last November from US$6.45 in the opening month of the 2008-2009 contract year. The volume and price setbacks shrank export revenue by 40% to US$1.15 billion in November 2009 from US$1.9 billion a year earlier.

Currency exchange rate trends amplified the pain from exporters' point of view as the rising value of the Canadian loonie reduced the worth of U.S. dollars received for their gas. When converted to Canadian currency, November gas export prices dropped by 40% to C$4.41/gigajoule (GJ) from C$7.33/GJ. Revenues fell by 48% to C$1.22 billion from C$2.3 billion.

Although sales performance was uneven, prices fell across the board at all major U.S. destinations for Canadian gas exports. November pipeline deliveries to California jumped 37% to 46.6 Bcf but prices dropped by 26% to US$4.49/MMBtu. Sales volumes in the U.S. Pacific Northwest rose by 21% to 44.6 Bcf but prices retreated by 27% to US$4.63/MMBtu. November pipeline exports to the U.S. Middle West fell by 30% to 91.6 Bcf, and prices dropped by 32% to US$4.21MMBtu. Canadian gas deliveries to the U.S. Northeast shrank by 24% to 69.7 Bcf, and prices deteriorated by 33% to US$4.69/MMBtu.

While Canadian industry analysts predict that the stormy and frosty heating season will launch a gas recovery, the Alberta government shows doubts in its recently presented 2010-2011 budget.

The chief Canadian gas-producing jurisdiction's finance department expects the lean spell to resume after heating season, with Alberta output only averaging C$4.25/GJ (US$4.19/MMBtu) for the provincial fiscal year commencing April 1.

The treasury's gas royalty revenue is expected to stagnate at C$1.86 billion (US$1.75 billion), about the same as in the 2009-2010 fiscal year and a grim 68% less than the C$5.8 billion (US$5.4 billion) of 2008-2009.

Hopes of even a modest recovery are deferred until the 2011 and 2012 provincial fiscal years, when the annual average Alberta gas price is projected to rise to C$5.25/GJ (US$5.18/MMBtu) then again to C$5.50 (US$5.42/MMBtu).

Alberta budgets have a track record of low-balling energy price and royalty forecasts as a political exercise in enabling the government to later unveil pleasant year-end surprises. But the long-range outlook for gas royalties remains highly unsettled, with a promised "competitiveness review" now nearing completion and liable to generate at least selective rate cuts to encourage development of unconventional supplies led by shale deposits.

Oilsands royalties are forecast to top the province's natural gas revenues for the first time.

While the about-face is chiefly due to soft gas markets, trends within the oil side of Canada's energy mainstay province are contributing to the change.

The provincial treasury projects a 2010-2011 fiscal year bumper average oil price of US$78.75/bbl. Oil sands royalties are forecast to hit C$3.2 billion, up sharply from C$1.8 billion in 2009 and better even than the C$2.9 billion in the world market record year of 2008.

Oilsands royalties are on their way up at an accelerating pace due to a combination of rising production and an extra bonus of price increases for their type of production. Discounts off benchmark West Texas intermediate prices against low-grade bitumen production -- about one-third of oil sands marketed output -- have shrunk to about 30% over the past year from long-standing previous averages in the 50% range.

The change is credited to changes in the world oil supply mix and especially to Canadian export pipeline expansions and extensions. Numerous projects are ending traditional confinement of Canadian production to crowded Chicago-area markets by lengthening the Alberta bitumen belt's marketing reach to the U.S. petroleum coast refining region of Texas and Louisiana.

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