Canadian natural gas production is expected to increase by a meager 0.2% this year and then begin a decline as conventional gas extraction in Alberta slowly falls, the Conference Board of Canada said Wednesday.

In its industrial outlook for Canada's gas extraction industry, the nonprofit group said above-average temperatures in the closing months of 2006 alleviated gas demand in North America. As a result, prices plunged, averaging below C$6/gigajoule in the second half of 2006. The falling prices in turn led to a 1.1% decline in gas output over 2005.

"A decline in production and lower prices led profits to tumble in 2006, and, with both prices and production expected to be flat this year, profits will not improve significantly in 2007," said senior economist Michael Burt. "But with gas prices beginning to rebound in 2008, profits are expected to pick up again."

According to the report, industry profits fell by almost 25% in 2006 from 2005 to C$9.5 billion from C$12.7 billion. Profits are expected to stay flat in 2007, but as gas prices bounce back in 2008, profits could surpass C$14 billion, the board noted.

Another worry for the energy sector is rising costs, the report noted.

"Competition for labor and materials is sharply increasing costs in Alberta's energy sector," said the Conference Board. "In 2006, total costs for extracting natural gas increased by 10.1%. Although cost pressures from labor and material costs will wane, growth in capital costs will remain significant over the next four years."

The Conference Board's industrial outlook for the gas extraction industry is part of its broader report on the country's oil and gas industry, which is published twice a year. To read the entire report, visit www.conferenceboard.ca.

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