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Sumas Price Spike May Signal New Trend

Sumas Price Spike May Signal New Trend

A steep price spike highlighted a lasting change in natural gas prices at Sumas, the Washington state entry point for exports from British Columbia, say Canadian producers and marketers.

The spike-which peaked at $25/MMBtu for flow on Dec. 21 and remained above $6 last Monday and Tuesday-was credited chiefly to constraints on Northwest Pipeline, which picks up gas from Westcoast Energy's B.C. grid at Sumas. But the spike went so high because the transportation problem also coincided with a cold snap that underlined changes over the past two heating seasons in the supply and demand fundamentals for B.C. gas.

From being the lowest-priced export point, where prices used to stagnate around $1 for months at a time, Sumas has become a consistent performer for producers with B.C. wells such as Poco Petroleum Ltd., which has become one of the province's leading drillers.

Poco President Craig Stewart said it turned its attention to gas-rich northeastern B.C. from shallower, easier drilling on the Alberta plains as a result of marketing experience. Starting about 18 months ago, Poco's export agents detected a strong trend for production from the Rocky Mountain region of the United States to flow east as a result of American pipeline developments that raised "take-away" capacity. That coincided with demand in the region due to a strong economy and increasing reliance on gas-fired electric generation.

The eastbound Rocky Mountain supplies both opened up room for Canadian exports in the U.S. Pacific Northwest and led to a general tightening up of the supply picture in the region. "It became much more of a market in equilibrium in the Pacific Northwest," Stewart said.

The trend became strong enough to trigger a C$250 million (US$170 million) asset and drilling-prospects purchase this year by Poco in the remote but prolific Monkman gas field in northeastern B.C. Even before the pre-Christmas spike, Sumas prices were nudging US$3 per MMBtu, or about $1 more than other destinations for Canadian supplies.

Stewart predicted B.C. gas producers can count on an anticipated general firming of Canadian prices for some time to come. While drilling is expected to fall behind pipeline capacity additions everywhere, producers like Poco believe the lag will be especially long in B.C. Supply development there amounts to frontier exploration in forbidding country west of the Alaska Highway as it stretches north from its starting point at Dawson Creek past Fort St. John and Fort Nelson.

Wells in northeastern B.C. areas like Monkman have repeatedly yielded flows approaching 90 MMcf/d. But they are time-consuming, multimillion-dollar exercises in deep drilling in remote mountain terrain where producers have to hack rig sites and equipment roads out of virgin bush, while adhering to strict environmental controls and negotiating access with a touchy native population.

"It's as difficult drilling as you can do in Canada," Stewart said. The Canadian producer community is scrambling to switch drilling targets to gas from oil. But producers who have always given priority to gas like Poco believe they will reap the benefits of a tightening market for months or even a year or two before others catch up and change the supply picture again. Especially in new areas like B.C., Stewart said, "you don't flip on and off exploration. The fashion is gas. The reality is it takes two to three years to develop an intelligent exploration program."

Gordon Jaremko, Calgary

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