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Falling Prices Crush Canadian Production, Exports

The new Canadian natural gas export year is off to a weak start, with volumes continuing to slip as reduced prices slow supply development, according to trade records kept by the National Energy Board (NEB).

Pipeline exports to the United States dipped 3.3% to 275.8 Bcf as the 2006-07 contract year opened last November from 285.2 Bcf in the first month of 2005-06, the Canadian regulator found. The average price fetched at the international border tumbled 34.7% to US$7.09/MMBtu last November from $10.84/MMBtu in the same month a year earlier. Canadian gas export revenues fell 37.1% to US$1.97 billion last November from $3.13 billion in the opening month of the 2005-06 contract year.

According to the NEB's data, the weakness showed across the board in all destinations for Canadian gas exports. Pipeline deliveries to California dropped 58% to 16.5 Bcf last November from 39.4 Bcf in the first month of the 2005-06 contract year. California prices dropped 34.1% to US$6.54/MMBtu from $9.92/MMBtu. Shipments to the U.S. Midwest faded 2.2% to 115.8 Bcf from 118.4 Bcf. The average price fetched by exports to the region plunged 37.5% to US$7.18/MMBtu from $11.49/MMBtu.

Exports to the northeastern states only slipped by one-half of one percent to 93.6 Bcf last November from 93.9 Bcf in the same month a year earlier. But U.S. Northeast prices were down 30.1% at US$7.49/MMBtu from $10.72/MMBtu.

However, pipeline deliveries to the Pacific Northwest bucked the trend by rising 54.9% to 49.6 Bcf last November from 32 Bcf in the first month of the 2005-06 contract year. But the average price fetched by exports to the region plunged 37% to US$6.32/MMBtu from $10.03/MMBtu.

Canadian exports to the U.S. Rocky Mountain region dropped to a minuscule 300 MMcf last November, down 80.7% from the 1.4 Bcf in exports during the same month a year earlier. Rockies prices slid 27% to US$6.74/MMBtu from $9.24/MMBtu.

The performance continued a trend that set in during the latter half of the 2005-06 contract year, when North American prices came off highs fueled by 2005 hurricane damage to production in the Gulf of Mexico. Canadian exports to the United States shrank by 4.8% in the natural gas contract year that ended Oct. 31, the NEB said. Total contract year pipeline deliveries to all U.S. destinations were 3.55 Tcf, down from 3.73 Tcf in the 12 months that ended Oct. 31, 2005.

For the full 2005-06 contract year, prices fetched by pipeline exports at the international border averaged US$7.37/MMBtu, up by only a marginal 1.8% from $7.24/MMBtu in the previous 12 months. When combined with the erosion of sales volumes, the price trend led to a revenue reversal. The total value of Canadian gas exports for 2005-06 was US$26.4 billion, down 3.2% from $27.3 billion the preceding contract year.

Increases in the value of the Canadian dollar against its U.S. counterpart pushed last year into negative territory for exporters when their results were measured in their own currency and volume units. By that yardstick, border prices averaged C$7.86 per gigajoule in the 12 months that ended Oct. 31, down 4% from C$8.18 the previous gas contract year, the NEB's data showed. Export revenues in Canadian currency were C$30.2 billion for the 2005-06 contract year, down 8.7% from C$33.1 billion in the preceding 12 months.

Just how sharply the price tables turned showed in the NEB's gas export tally for the final month of the 2005-06 contract year. Last October, the average export border price sank to a low of US$4.81/MMBtu. That was down by 58.8% from US$11.66 in October of 2005.

The long slide off the 2005-06 fall and winter market spike prompted predictions that Canadian supply activity would taper off -- and they have turned out to be right. While still busy by long-range historical standards, drilling is in a lull compared to frenzied activity last winter. Canadian field activity continues to be seasonal, with most work packed into cold months when northern muskeg swamps freeze over hard enough to support heavy drilling and well completion equipment.

As of the last full week of February, 643, or 75% of the 856 available Canadian drilling rigs were in use. The activity remains strong by historical standards. The entire Canadian fleet was only about 500 rigs in the late 1990s. But in the record-breaking 2005-06 winter drilling season, 744 rigs, or 96% of a total 778 available were employed.

Canadian industry analysts predict activity will drop off even more sharply than usual during annual spring breakup, when northern terrain melts and rigs move out to locations where they will not sink into deep mud and bogs. Then the customary summer activity revival is forecast to fall well off the 2006 pace, as shallow drilling for small targets tapers in southern areas including coalbed methane areas.

Canadian industry analysts such as FirstEnergy Capital Corp. have suggested there are two silver linings in the clouds hanging over Canadian gas producers' immediate future. In the gas fields, the increased surplus of rigs is expected to stabilize or reduce costs that were formerly climbing rapidly by forcing drilling contractors to freeze or cut fees in order to compete for scarcer business, according to FirstEnergy Capital.

On gas markets, the slowed pace of supply development is expected to contribute to revived upward pressure on prices by next heating season, the analysts found. Besides reduced drilling, increasing domestic consumption -- led by rising demand for gas from growing Alberta oilsands thermal extraction projects -- is expected to tighten volumes available to the international market.

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