Canadian natural gas production will shrink by as much as 500 MMcf/d this year and keep on dropping next year, the National Energy Board (NEB) said in a downward revision of supply forecasts.

The new outlook, changed in response to reduced drilling, predicts 2007 average western Canadian output will most likely dip to 16.8 Bcf/d, then to 16.4 Bcf/d in 2008. However, in a worst case scenario supplies could shrink as far as 16.6 Bcf/d this year and to 15.4 Bcf/d in 2008 as a result of poor prices, weak drilling results and continued corporate budget cutting, the NEB added.

Western Canadian production averaged 17.1 Bcf/d in 2006. The new projections are lower than the NEB's last forecast, made in mid-2006, by 580 MMcf/d for this year and 970 MMcf/d for 2008.

The changes take into account sharp reductions in drilling activity caused by soft prices and mid-2006 corporate budget cuts adopted to put a stop to rapid inflation in supply and service costs.

Canadian drilling will slow down by 27% to 16,339 wells this year from 22,298 wells in 2006, according to the latest forecast by the Canadian Association of Oilwell Drilling Contractors (see Daily GPI, May 29).

All the decline is in gas drilling. Oil drilling remains steady to growing in response to strong crude prices. The new NEB projections support expectations among the contractors that tightening supplies will make prices and activity take a turn for the better next year, said CAODC President Don Herring.

NEB officials predicted gas will continue to trade in a range of US$6-8/MMBtu this summer. But no such forecasts is a sure thing because the market will continue to be affected by weather ranging from heat waves causing increased use of gas-fired power for air-conditioners to the "wild card" of hurricanes in the Gulf of Mexico, the board said.

"Rising crude oil prices can provide some support for stronger gas prices," the NEB said. "Further declines in Canadian production would also have a positive price impact."

The NEB expects oil to keep on trading in the US$65/bbl range, with geopolitical tensions continuing to prop up prices. "The risk to this outlook appears to be mainly to the upside" due to constant market anxiety over the potential for international supply disruptions plus the possibility of more hurricanes damaging offshore production in the Gulf of Mexico, the board said.

Effects of the decline in Canadian natural gas production capacity could be amplified on the "continental market" with the U.S. At the same time as output tapers, domestic demand is on the rise as thermal oilsands projects grow in northern Alberta.

The reduction in Canadian supplies is being offset by rising production in the Midcontinent and Rocky Mountains regions of the U.S., plus increased liquefied natural gas (LNG) deliveries from overseas, the NEB said. LNG shipments to North America will taper off if normal weather prompts increases in European power station demand this summer, but new exports from Equatorial Guinea could also start as early as next month, the board added.

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