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Canada Gas Exports Seen 'Sharply' Declining by End of 2007

Canadian natural gas exports to the United States, which currently total about 9 Bcf/d, could decline by more than 1 Bcf/d by the end of 2007 because of the country's reduced drilling activity, rising field decline rates and higher gas demand, Raymond James energy analysts said Monday.

"Going forward, we believe that natural gas imports from Canada are poised to decline sharply," said analysts J. Marshall Adkins and James M. Rollyson in their "Stat of the Week." If they fell by as much as 1 Bcf/d, "this would represent a 10% to 20% decrease in Canadian exports and roughly a 1.5% to 2.5% decrease in overall U.S. gas supply."

Adkins and Rollyson noted that some of Canada's top gas producers have recently reduced their capital programs for 2007 because of rising service costs and concerns that the North American gas storage overhang will not correct itself this winter.

"EnCana Corp. and Canadian Natural Resources alone are expected to spend approximately $2 billion less in 2007 than 2006 (about 8% of industrywide spending on drilling)," they noted (see Daily GPI, Dec. 15; Dec. 13). "At present, there are approximately 200 less rigs drilling in Canada versus this time last year, a 29% reduction in active drill count," and "it is widely accepted that activity levels will remain well below the prior year for the first half of 2007."

Adkins and Rollyson noted that both the Petroleum Services Association of Canada (PSAC) and the Canadian Association of Drilling Contractors (CAODC) are forecasting a year-over-year decline in wells drilled. The PSAC is forecasting a 10% reduction; the CAODC is forecasting a 15% reduction. "In both cases, the reduction in activity is concentrated in shallow gas and coalbed methane drilling."

Raymond James base case assumes a "conservative 10% decline in gas well count, while our high case assumes flat activity and our low case assumes a 20% reduction in 2007 well counts."

The analysts said the Canadian gas supply picture "seems to be suffering from the same pandemic as the U.S. gas supply situation. Record-setting drilling activity has failed to materialize in rising production. Between 2002 and 2005, there has been a 76% increase in the number of natural gas wells drilled on an annual basis in Canada. Over the same time period, natural gas production actually declined slightly from 17.2 Bcf/d in 2002 to 17.1 Bcf/d in 2005."

According to Raymond James data estimating average initial well productivity within 17 defined exploration basins in Canada, if no additional Canadian wells were drilled in 2007, total Western Canadian gs supply would decline by 4.3 Bcf/d, or 26%, in 2007.

"While this analysis is predicated on broad assumptions, it comfortably squares with what intuition tells us; we simply cannot drill fewer wells in a year and expect to maintain production at current levels. Using the activity assumptions...we find that our base case assumption leaves total Canadian gas production down by 0.91 Bcf/d or 5.5% by the end of 2007." The analysts said "the tightening of the North American gas market should be a bullish long-term driver for gas prices."

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