Canadian natural gas exports are still shrinking, but the speed of the decrease is slowing amid early signs that the prolonged supply decline will end.

Pipeline deliveries into the United States slipped by 3% to 1.98 Tcf during the first seven months of the 2009-2010 contract year from 2 Tcf for the comparable period of November through May of 2008-2009, according to the latest trade data compiled by Canada's National Energy Board (NEB). Average prices at the international border also gave up 3% by dipping to US$4.98/MMBtu and export revenues went down 6% to US$9.7 billion.

But the lame current performance of the Canada-U.S. gas trade looks strong in contrast to the tumble experienced a year earlier. In the November-May period of 2008-2009 the drops from 2007-2008 were severe as export volumes shrank by 13%, border prices plunged by 40% and revenues plummeted by 47%.

The number of drilling rigs at work continues to show that an investment and supply recovery is beginning.

As of this week, field contractors reported that 391 rigs were working across western Canada -- more than double the 190 that were drilling in mid-August.

As projected by industry trade associations and financial analysts since last winter, oil has replaced natural gas as the leading Canadian drilling target for the first time in memory. An estimated 60% of the current activity, employing 215 rigs, is aimed at oil.

But gas is making a comeback. The estimated 161 rigs that are currently drilling for gas represent a 77% increase from the 91 that were on the job a year ago.

The recovery has startled field contractors, prompting the Petroleum Services Association of Canada (PSAC) to point to a problem that no one expected to re-emerge any time soon: personnel recruitment.

There is a "challenge of finding skilled labor for those companies fortunate enough to be busy," PSAC President Roger Soucy said in recently releasing an updated forecast by his group of more than 250 employers. "Companies forced to shed valuable employees last year are now scrambling to hire them back or find replacements."

PSAC projects that, counting oil- and gas-targeted drilling, 11,250 wells will be drilled this year, a 35% increase from forecasts made during the worst spell of the recession last fall that the total would only reach 8,350 in 2010 and 2011.

The biggest projected provincial field activity increase -- 27% to 7,390 wells -- is in Alberta, where there are oil targets and royalty reductions announced in the spring improved the industry's economics.

But British Columbia, where gas is virtually the sole drilling target, is experiencing a 22% increase in drilling to 700 wells this year, PSAC says. The numbers fall short of describing the extent of industry activity in British Columbia, where the growth is in deep and horizontal wells that take a month or more to tap tight or unconventional deposits embedded in shale or other dense geological formations.

The market shows signs of continuing to support the activity recovery, reports FirstEnergy Capital Corp., a Calgary-based investment house that makes a specialty of tracking gas trends in great detail.

"Weather has been supportive through the summer, and with reduced liquefied natural gas imports into the United States, Canadian exports have been a beneficiary of the hot temperatures (driving up air-conditioning demand for electricity from gas-fired power plants)," FirstEnergy said in a research note.

As an early tangible sign of market improvement, volumes of Canadian gas in storage have begun to shrink in comparison to the glut that severely depressed prices and led to production shut-ins at this time last year, FirstEnergy said. The difference in inventories, while not spectacular by standards of the 632 Bcf still currently in Canadian storage, is nevertheless noticeable at 700 MMcf less than this time last year.

The emerging reduction in storage volumes will likely continue for at least the rest of August, the firm predicts. "A shut-in scenario is becoming less and less likely for late August and September," it said.

©Copyright 2010 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.