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Canadian Gas Exports to U.S. in Decline

Canadian natural gas exports dropped at an accelerating rate during the heating season, according to the latest trade records kept by the National Energy Board (NEB).

Pipeline deliveries to the United States fell by 12% to 324.7 Bcf in December from 371.2 Bcf a year earlier. In the first two months of the contract year that starts Nov. 1, Canadian exports declined by 9.3% to 616.9 Bcf from 680.3 Bcf during the same period the previous year.

Prices and revenues fetched at the international boundary also sank. Canadian exports averaged US$6.44/MMBtu in December, down 13.3% from US$7.43/MMBtu a year earlier. December revenues from deliveries into the U.S. were off by 23.6% at US$2.1 billion compared to US$2.8 billion for the same month a year earlier.

For the first two months of the 2008-2009 contract year, average export prices dropped 11.8% to US$6.45/MMBtu from US$7.31/MMBtu during the same period of 2007-2008. Export revenues fell by 19.7% to US$4 billion from US$4.9 billion.

Favorable exchange rates continued to mask the deterioration, however. Over the past 18 months the Canadian dollar has slipped from about par with its U.S. counterpart into the 80-cent range, effectively giving exporters a 20% pay raise.

In loonies, average prices fetched by Canadian gas exports rose by 9.6% during the first two months of the 2008-2009 contract year to C$7.37/gigajoule (GJ) from C$6.73/GJ during the same period of 2007-2008. Revenues held steady at C$4.9 billion as the favorable currency movement almost exactly compensated for the drop in delivery volumes.

Pipeline exports dropped to all but one significant U.S. destination during the first two months of the 2008-2009 contract year from the same period of 2007-2008. The slippage was 9% to 81 Bcf in shipments to California, 11.6% to 264 Bcf to the U.S. Midwest and 12% to 180 Bcf to the U.S. Northeast. The exception was the U.S. Pacific Northwest, where Canadian shipments rose 5% to 91 Bcf.

The current, 2008-2009 contract year erosion of export volumes continues a trend that set in about a year ago. Total pipeline deliveries volumes to the U.S. rose by only a marginal 0.1% to 3.708 Tcf in the 2007-2008 contract year from 3.703 Tcf in 2006-2007.

By May of 2008 NEB records show the decline in export volumes hit 10.8% to 259 Bcf from 290 Bcf in the same month of 2007. The monthly slippage was 6% in June (to 274 Bcf from 291 Bcf), 9% in July (to 288 Bcf from 318 Bcf), 14% in August (to 291 Bcf from 338 Bcf), 11% in September (to 280 Bcf from 316 Bcf) and 11% again last October (to 278 Bcf from 313 Bcf).

Industry analysts blame the deterioration of the international gas trade on the faltering economy drying up American industrial demand, growth in Alberta consumption by thermal oilsands projects and erosion of western Canadian supplies by a worsening drilling slump.

A week of deteriorating prices after the Alberta government announced a forecast C$1.5 billion (US1.2 billion) in 2009 hard-times drilling aid (see Daily GPI, March 5), the verdict is the help will at most slow down the decline in field activity.

The Small Explorers and Producers Association of Canada, which led a campaign for the help, predicted companies will respond by at least reducing planned budget reductions or restoring cuts already made and in some cases increasing drilling.

The Petroleum Services Association of Canada (PSAC), also an enthusiastic supporter of government help, predicted the 2009 aid will rescue field activity. PSAC has forecast a 27% drop in Alberta drilling to 8,455 wells this year. Alberta accounts for about four-fifths of Canadian industry activity. The lone growth spot in Canadian drilling is northeastern British Columbia, where shale gas development using technology imported from Texas is on the rise.

The Alberta aid program cuts 2009 royalties by capping rates and providing special credits geared to depths of new wells. Industry analysts such as Peters & Co. and AJM Petroleum Consultants observed that the program's effects will be uneven.

Only companies with healthy production and strong cash balances or unused credit lines are expected to benefit. It takes production to benefit from royalty cuts, and capital markets are described as effectively closed to small or young firms still trying to build up output in the exploration phase of the industry life cycle.

A new royalty regime that Alberta introduced as of January over heated industry objections can no longer be blamed for the drilling slump, AJM suggested. Rates are now lower than they would have been under the old regime because the overhaul increased the system's sensitivity to price changes in both directions, down as well as up, the consulting house pointed out. The new rates are down by as much as half for shallow gas wells producing less than 400 MMBtu/d. Much bigger problems of economic recession, softening demand, glutted markets and falling gas prices have replaced royalties as the chief drag on the Canadian industry, most analysts agree despite lingering bitterness over the Alberta changes.

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