Sparked by natural gas prices that have been lower than in recent years, the Canadian energy industry is bracing for a prolonged lull in natural gas drilling, with field employers quietly letting staff go after giving up hope for a speedy recovery of producer spending.

Canadian field activity will drop by as much as 27% this year off 2005 and 2006 peaks, say projections by the Petroleum Services Association of Canada (PSAC) and the 125-company Canadian Association of Oilwell Drilling Contractors.

Supply effects of the drilling lull remain debatable in detail but on one point there is consensus -- the general trend will be a drop in Canadian production this year. Losses are widely expected to be 400-600 MMcf/d, with some analysts suggesting export capacity could shrink by 1 Bcf/d as domestic consumption rises chiefly due to growing oilsands use of gas in thermal production plants.

"Most of our competitors started this process several months ago," Sanjel Corp. Vice President Murray Lambkin said in confirming that his firm cut its payroll by about 10%, or 100 jobs this month.

Sanjel, an industry fixture that provides an array of well completions and allied services, was able to postpone taking action because it is privately owned and does not publish quarterly statements to a stock market following, Lambkin said. Staff cuts are about the last action field contractors want to take because they stand to take permanent losses of skilled personnel who will be needed when the activity cycle turns around.

The gas drilling lull is only expected to cool down the Alberta economy and not cause an abrupt end to growth related to a multi-billion-dollar oilsands plant construction and investment rush. "The province will continue to expand at double the rate of the rest of Canada," TD Economics predicted after reviewing gas drilling setbacks in its latest forecast.

"We chose to delay until the very last minute," Lambkin said in explaining Sanjel's layoffs. Oilfield employers hesitated to make cuts when drilling fell off in March due to "extreme risk" that laid-off staff would switch to other fields, such as construction, he added.

"Once they're gone the chances of them going back [to oilfield work] are pretty low," said PSAC President Roger Soucy. "After what these companies went through trying to get people for the last three years they weren't going to let them go easily."

But persistent weakness in Canadian gas prices and spending cuts made by producers last fall to curb cost inflation forced employers to put Alberta's 2005 and 2006 gas and coalbed methane drilling boom behind them and start counting expenditures again.

"It's lasted longer than we anticipated," Lambkin said, adding that there is no reliable sign of a recovery. "We can't see ahead very clearly right now."

"It really depends on what happens with gas prices," Soucy said. "The bottom has fallen out of that end of the industry." Gas is the target for about three-quarters of western Canadian field activity and dominates the business of the 270 companies in his association, including Sanjel.

Employment in the group's specialties, from work camp catering to high-tech well completions and equipment manufacturing, peaked at about 68,000 in February, or more than double Canadian field skeleton crews of the lean 1990s.

It is too early to tell yet if Sanjel's 10% cut will turn out to be an industry standard, Soucy said. "My gut would tell me it's probably not dissimilar to what a number of companies are doing." Workers affected by the paring recite across-the-board cuts affecting wage earners, field supervisors and office managers. The paring also ended boom time job perks such as bonuses and personal use of company pickup trucks.

Although employment of the western Canadian drilling fleet has more than doubled since touching bottom in early spring, the 261 rigs at work last week were still 34% fewer than the 398 that were busy in mid-June of 2006. Compounding the industry's problems, the total size of the fleet has grown to 886 rigs, or about 50% more than competed for work during the last gas drilling lull five years ago.

Layoffs by PSAC's service and supply employers come on top of job cuts at drilling contractors. An estimated 3,500 workers are expected to be left idle by a forecast drop in the average number of rigs operating to 376 this year from 501 in 2006.

"We need C$8 (US$7.60) gas or better to bring that end of the business back in any meaningful way," Soucy said. And increased prices will have to show they have staying power by lasting for a few months before field spending and activity pick up significantly, he added.

Canadian natural gas prices have been cut in half over the past 18 months to C$7 (US$6.65) from a peak seasonal average of C$14 (US$13.30) after hurricanes damaged production in the Gulf of Mexico, show records kept by GLJ Petroleum Consultants. Alberta gas will average C$7.30 (US$6.95) this year, GLJP predicts. Canadian gas industry financial firms FirstEnergy Capital and Peters & Co. have also lowered their 2007 price expectations for natural gas.

Canadian prices have been falling behind U.S. markets. The lag is blamed on full storage north of the international border and the rising value of the Canadian dollar against its U.S. counterpart. The current exchange rate, in the range of C$1 to US$0.94, has effectively lopped about C$0.60 off Canadian gas prices since mid-2006, financial analysts estimate.

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