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Capitalist $$$ Invade Canadian Gas Field

Capitalist $$$ Invade Canadian Gas Field

Canadians are being told --- by American investors on the prowl for pieces of the action --- that the North American natural gas market is headed for a spell of very tight supplies and they stand to be prime beneficiaries. The projection emerged as a consensus at a Calgary conference billed as the mightiest assembly of financial muscle ever held in the Canadian gas capital.

A Florida-based investment house --- Raymond James & Associates Inc., the top off-Wall Street brokerage, with about 1,400 offices including a busy one in Calgary --- took north 16 specialty houses in private placements of sophisticated investor funds as "energy capital providers." The group, ranging from E.M. Warburg Pincus and Energy Spectrum Partners to Southern Energy Capital Group and Stratum Group LP, collectively counted assets of US$14.4 billion, including $9.9 billion looking for new homes. Most already had satisfying experiences of dabbling in Canada, across a full range of sectors from exploration and production to seismic surveying and industrial catering.

In the collective view of Canada, chief investment officer James Spann from the Dallas office of Energy Spectrum Partners was typical. The firm is a believer in Canadian gas: "It's a solid story...really it's only just begun." Spectrum just laid out C$26 million (US$18 million) for a 57% stake in a new entry into gas gathering and processing, Canadian Midstream Services Ltd., which has quickly accumulated Alberta assets and expects to announce soon a new acquisition on the drilling frontier in northeastern British Columbia. "We don't think U.S. production is going to be there to meet demand," added Spann, whose firm also has interests in East Texas gas processing and gathering.

Will Honeybourne, Houston managing director of First Reserve Corp., agreed "we see a lot of upside potential" in Canada after gas export revenues achieved an annual growth rate of 20% as volumes doubled and prices firmed in the 1990s.

The potential is for big and fast gains, in the calculations of Raymond James senior analyst Wayne Andrews. From his desk in Houston, Andrews sums up the gas outlook with a famous phrase from the days of the space race: "Houston, we have a problem."

Andrews' charts of production data from state agencies suggest U.S. output dropped by 5.7% in 1999 to 41 Bcf/d from 43.5 Bcf the year before. (He records declines of 6.4% to four Bcf daily in Louisiana, 2.5% to 4.4 Bcf in New Mexico, 14% to 3.9 Bcf in Oklahoma, 5.5% to 15.1 Bcf in Texas and 4% to 13.6 Bcf in federally-managed offshore territory). Consistent with the production data, the Andrews charts also show a sharp decline in summer injections into gas storage to 1.66 Tcf in 1999 compared to 2.08 Tcf in 1998 and a 1995-99 five-year average of 1.92 Tcf. If the state production data stands up, Andrews expects the industry to enter the 2000-01 heating season with a November inventory of 2.25 Tcf or 25% less gas in storage than last fall.

His figures suggest the market cannot count on Canadian gas taking off the pressure any time soon. While production shows no signs of declining, there is also no reason to believe the old surplus "bubble" will return any time soon.

Andrews, echoing agencies such as the Canadian Gas Potential Committee, points to failures to increase volumes going into the Nova gathering grid in Alberta much beyond 12.5 Bcf/d last year despite accelerated drilling. Firm prices are generating a shift in Canadian field activity, but it is expected to be some time before the new generation of higher-grade wells being drilled in the Rocky Mountain foothills and northern frontiers of Alberta and B.C. can make up for a natural production decline rate that currently averages about 25% per year in much cheaper, shallower southern wells.

In the Andrews calculations, the tightening supplies translate into strong prices: US$2.40 per MMBtu by the end of March, up from $1.82 in the spring of 1999, then $3.50 in November compared to $2.65 last fall. At worst, if there are no cold snaps and productivity comes in higher than expected, the scenario anticipates prices of $2 this spring and $3.00 in the fall. Andrews refuses even to guess where prices will end up, saying only that changes will be just plain "BIG," if productivity erodes further and the weather turns colder.

Gordon Jaremko, Calgary

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