Canadian producers have been surprisingly effective in increasing producing despite steep wellhead decline rates and expectations that the response to drilling would be weak, according Lehman Brothers. Data recently released by Canadian pipelines shows gas production was up 9.3% or 1.3 Bcf/d in November from November 2000, which was following the 8.4% increase in October. However, E&P expenditures are expected to be down 20% this year and rig utilizations already have dropped by 21%.

The Ladyfern project, which produced 510-520 MMcf/d in November, in northeastern British Columbia accounted for about 40% of the November increase, Lehman Brothers noted in its equity research report. In December, Ladyfern produced an estimated 520-530 MMcf/d. Recent expansions by Canadian Natural Resources and Murphy Oil/Apache Corp. have increased production there to 620-630 MMcf/d. Total capacity for the Ladyfern pool has been capped at 750-800 MMcf/d by the partnership among Alberta Energy, Apache, Canadian Natural and Murphy Oil.

“With the industry scrambling to find Ladyfern ‘look-a-likes,’ another discovery of this size would put additional downward pressure on North American natural gas prices,” Lehman Brothers analysts said. “While reduced drilling should theoretically result in production declines if another Ladyfern type field is found, then we would expect production adds to more than offset and declines that would result from this decrease in spending. It is our belief that another 100 to 200 MMcf/d of incremental production could put more pressure on natural gas prices both in the U.S. and especially in Canada as all of this gas may not find a market in the already saturated U.S.”

Lehman Brothers analysts noted that despite the massive production increase in Canada last fall and early this winter, net gas exports to the United States were up only 74 MMcf/d or 1% in 2001 over 2000 levels to 9.6 Bcf/d. During November 2001, net exports were down 975 MMcf/d or 10% from the prior year and December exports were down 19% to 8.8 Bcf/d.

The weaker demand in the United States also may be reflected in Canadian natural gas storage levels, which at 444 Bcf on Jan. 3 were 173 Bcf higher than last year and 102 Bcf higher than the four-year average.

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