Canadian natural gas exports deteriorated further during the 2009-2010 heating season, contributing to an accelerating switch of drilling targets to oil north of the border.

Pipeline deliveries fell by 6% to 1.438 Tcf during the five months of Nov. 1 last year through this March 31 from 1.528 Tcf in the same period of 2008-2009, show gas trade records of the National Energy Board.

The average 2009-2010 heating season price fetched by Canadian gas at the international boundary also dropped by 6% to US$.5.28/MMBtu from US$5.62 a year earlier.

The combination of falling volumes and prices cut export revenues for the November through March period by 12% to US$7.64 billion for 2009-2010 from US$8.66 billion in 2008-2009.

An exchange rate trend deepened the financial losses. A strong rise by the Canadian dollar to near-parity with its U.S. counterpart effectively doubled the setbacks.

Measured in loonies, 2009-2010 heating season export prices plunged by 20% to C$5.15 per gigajoule. Revenues fell by 25% to C$8 billion.

Up to 60% of Canadian gas is exported to the United States, and effects of the trade’s decay stood out at an annual, well attended symposium held last Wednesday in Calgary for a wide range of companies to show their stuff to investors by the Small Explorers and Producers Association of Canada (SEPAC).

“It’s all about oil — you won’t hear much about gas,” said SEPAC Executive Director Gary Leach.

“If you stood up and tried to tell a story about gas to these money managers all you’d hear in the hall would be the crickets,” joked Bellamont Exploration Ltd. President Steve Moran.

Practical results of the glum Canadian view on the outlook for gas for the next few years are no joke. Moran said 96% of Bellamont’s 2010 drilling budget will be dedicated to oil. The target change is dramatic among Canadian independent producers. Moran also set a goal of rapidly increasing the oil share in Bellamont’s output to 45% from 35%, with a corresponding reduction in the company’s gas weighting.

The switch also drives corporate mergers and asset acquisitions north of the international border.

On May 26, for instance, Yoho Resources Inc. drastically changed courses with a takeover of a private firm whose main asset was a northwestern Alberta oilfield called Sweeney.

Yoho President Brian McLachlan told investors at the SEPAC event that his company aims to achieve a quick near-doubling of oil’s share in its production mix to 25%.

Yoho is currently 86% gas. Only six months ago the company participated in an industry scramble to buy drilling rights in a northern Alberta shale gas region called Duvernay. The provincial government netted about C$330 million (US$317 million) on Duvernay acreage at a single drilling rights auction just before Christmas.

No one is giving up on gas permanently, producer executives told the SEPAC investor show-and-tell. Pilot projects in shale gas extraction are continuing, with test wells being drilled to try out horizontal drilling and multiple fracturing combinations on various formations.

But the timing for turning the trial runs into large-scale supply development programs remains unknown because glutted U.S. and Canadian markets have to tighten up to justify the costs, producers said. Not even spring announcements of increasingly generous Alberta government royalty reductions for using shale gas production technology are forecast to have large immediate effects.

“We still need more support from gas prices,” said Birchcliff Energy Ltd. President Jeff Tonken. “We still managed to have earnings” in first-quarter 2010 — “which is very difficult” for an exploration and production firm whose production is more than 70% gas, Tonken said. He added that Birchcliff is only continuing to drill for gas because it has a rare combination of a wholly-owned processing plant and field gathering pipeline network plus an inventory of zero-risk “repeatable” development well prospects that keep operations profitable at prices below US$4.50/MMBtu.

A new forecast for 2010 by the Canadian Association of Oilwell Drilling Contractors echoes an earlier projection by the Petroleum Services Association of Canada. Expectations for the number of wells that the industry will drill this year have risen into the 11,500-11,600 range from previous predictions of a hard-times level of 8,000. But “the increase in activity is oil focused,” the contractors say.

Until markets truly tighten up Canadians can only hope that prominent Houston contrarian Henry Groppe was right in his startling recent forecast of a rebound to US$8/MMBtu after a summer of weak prices, said Bruce Edgelow, chief of energy industry lending at Alberta government-owned ATB Financial. The regional bank has an oil and gas loan portfolio of C$4.9 billion (US$4.7 billion), he disclosed.

The entire Canadian financial sector can be counted on to cheer for a gas price recovery. Over the past five years energy business loans outstanding in Canada have nearly doubled to C$31 billion (US$29.8 billion) from C$16 billion (US$15.4 billion), Edgelow reported. ATB alone committed an additional C$2 billion (US$1.9 billion) to the oil and gas sector last year. “We collectively are supporting you,” the bank executive said.

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