A supply/demand forecast released by Nova Corp. confirms whatmany market observers have expected: Canadian gas producers will behard pressed to fill all the new transportation capacity coming online this winter and could find it even harder to fill storage andmeet demand next summer.

“We have already seen a dramatic price spike this winter goingforward into next summer due to the increased capacity,” said oneCanadian marketer, quoting November-through-March term deals atC$2.80-84/Gj, which is 60 cents more than last winter. “We feel thenet effect of the increased pipeline capacity will make Alberta theplace to be in terms of having natural gas assets. This is alreadybecoming a reality in the prices,” he said.

Nova, however, presents a relatively optimistic assessment ofwinter production. It is expecting 12.9 Bcf/d of field receipts, a500 MMcf/d increase from this summer and 700 MMcf/d more than lastwinter despite the significant decline in rig utilization thisyear. Field receipts last winter averaged 12.4 Bcf/d, up only 200MMcf/d from the previous summer. The forecast is based on Nova’sexpectations that rig utilization will rise slightly, gas wellcompletions will be similar to the strong performance last year andgas well connections will exceed last year’s levels by 21%.

The relatively strong performance by producers, however, willnot be sufficient to fill the 1.1 Bcf/d of new transportationcapacity expected to be added by TransCanada (417 MMcf/d) andNorthern Border (700 MMcf/d) this winter, and Nova expects storageto make up the shortfall.

“We have seen a shift in capacity-supply dynamics, and we sawthis signaled in the forward markets around the summer,” saidTransCanada spokesman Gary Davis. “The real shift is that in thepast supply coming from the field met demand and storage was apricing option. What’s happened this year is that.supply will notbe enough to meet the demand by itself so storage will turn from apure pricing option to a supply and pricing option. To meet the13.8 Bcf/d [of average expected deliveries] what you’re looking atis 12.9 Bcf/d in field receipts (production) and 900 MMcf/d ofstorage withdrawal.” That’s 200 MMcf/d more gas from storagerequired to meet average demand than occurred last winter. ButNova’s Jeff Rush noted storage was half full when last winter wasover.

“900 MMcf/d is not a big stretch,” said Davis. “If we have areal cold winter it will be more of a challenge.” Nova is expectingdemand to peak on the coldest days at 14.2 Bcf/d, which wouldrequire the total pipeline capacity available, including the 1.1Bcf/d added by TransCanada and Northern Border. On those days,storage will be responsible for serving 1.3 Bcf/d of demand. Davissaid maximum storage withdrawal capability available to thepipeline system is about 2 Bcf/d.

“This is a manageable situation but it is a harbinger of a moreserious supply issue that we’ll face in the future,” he said.”We’re okay this winter and probably for next winter, but whenAlliance comes on line and brings another large increment of supplyin 2000, that’s when we’ll see a more significant dynamic betweensupply and capacity.

“The real issue here, I think, is that something has occurredthat people didn’t anticipate and that is the problems in theequity markets. There’s just not enough cash to support drilling.That’s something that no one contemplated coming into this year.”

Rocco Canonica

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