As producers get organized for a forecast big push to acceleratedevelopment of Canadian natural-gas supplies, a hot market in fieldassets is emerging.

By mid-year, packages worth nearly C$5 billion (US$3.4 billion)were on the market, according to Sayer Securities Ltd., a Calgaryinvestment house that has made a specialty of tracking Canadianasset, acquisition and merger transactions.

The total includes properties sold recently by BP Amoco Canadafor C$1.6 billion (US$1.1 billion). Although the assets were all inoil production, the sale underlined the declared intentions ofleading Canadian gas producers to grow bigger. BP Amoco Canada soldthe oil properties in order to concentrate on gas and pay for thesharpened focus.

BP Amoco remains the top Canadian producer, with gross output ofabout 1 Bcf/d counting provincial royalty shares of 20-30%,depending on the characteristics of fields. But Canadian-ownedproducers, led by PanCanadian Petroleum and Alberta Energy, arenipping at the international giant’s heels and vowing to overtakeit soon.

The rising interest in gas is also illustrated by prices beingpaid for Canadian field assets, Sayer reports. Prices for gasacquisitions in first-half 1999 averaged a 16% premium over oil.Assets dominated by gas fetched C$6.67 (US$5.33) per barrel-of-oilequivalent, while packages that were primarily oil went for C$5.75(US$3.95) per boe.

The asset trends confirmed indications in higher-profiletakeovers that gas production dominates producer strategies inCanada. Burlington Resources of Houston scooped up Canada’sninth-biggest producer when it paid US$2.5 billion for PocoPetroleums Ltd., which is about 55% a gas company and 45% liquidscounting byproducts of its gas fields as well as oil. TalismanEnergy pointed to extensive gas assets in the Peace Country ofnortheastern British Columbia and northwestern Alberta to explainitself when it paid C$1.2 billion (US$825 million) for RigelEnergy.

By the Sayer count Canadian acquisitions and mergers inthird-quarter 1999 already exceed CDN$5 billion (US$3.4 billion).Along with costs of corporate takeovers driven by oil and gasprices, the value of transactions in reserves is expected toincrease. “The highest-priced deals are likely to be corporateacquisitions of companies that are weighted towards natural gas,”Sayer predicts.

The consensus that glory days have arrived to stay for Canadiangas is also underlined by another prominent Calgary specialty housein energy finance, FirstEnergy Capital Corp. In the latest in aseries of book-length status reports to investors, titled CanadianEnergy Synopsis, FirstEnergy projects years of gas growth.

The conservative “base case” at FirstEnergy anticipates fieldactivity will next year regain most of the ground it lost in 1998,when falling oil prices brought an abrupt end to the record pacethat saw 16,500 wells drilled in western Canada in ’97. For 2000,the FirstEnergy base case calls for 14,700 wells. But the numbercould be much bigger -potentially 17,500 wells – if expectationsshowing on commodity-futures markets come true, the Calgaryinvestment house says.

FirstEnergy maintains that even though rising oil prices haveput easier drilling and development targets in reach again, theprincipal driver of the Canadian industry is gas. In Canada atleast, gas is trusted far more than oil. The gas market is”continental” with the United States and the pipeline grid isexpanding for more traffic, while oil remains a global maze withmore complications including OPEC.

FirstEnergy says its canvassing suggests there has been a 5-6%erosion of U.S. gas production capacity at the same time asAmerican demand is holding firm and Canadian export capacity isexpanding. The investment firmsays it is reasonable to hopeCanadian gas prices will hold firm in coming years at CDN$3-$3.25(US$2-2.20) per Mcf – the first time they have regained that rangesince the onset of energy free trade and deregulation in themid-1980s.

The financial analysts also predict a huge effort will have tobe mounted in Canadian gas fields just to keep up with demand andeventually use all the new export pipeline capacity. On the basisof average drilling performances, FirstEnergy calculates it willtake 40,577 successful western Canadian gas wells over the next sixyears to fill up the new Alliance Pipeline Project on top ofexpansions by the TransCanada and Foothills-Northern Bordersystems.

Exploration and production companies are already under heavypressure to accelerate drilling, FirstEnergy maintains. The firmdoes not cover major Canadian gas producers such as BP Amoco, MobilCanada, Chevron Canada, Unocal and Phillips because they belongentirely to multinational corporations and do not trade separatelyon stock exchanges. Other surveys show that as a group, theforeign-owned companies’ gas production has been on the rise orsoon will be due to exploration successes such as northern drillingby Chevron.

But among the publicly-traded Canadian firms it tracks,FirstEnergy says “we currently estimate that 1999 exit gas volumesavailable for delivery will go down by approximately 300 MMcf/dversus 1998 exit levels of 12.8-12.9 Bcf/d . . . there is no doubtthat Canadian producers will have a hard time meeting contractualsupply commitments.”

The analysts, pointing to rising drilling-rig counts andfund-raising activity, say “currently Canadian producers are makingan all-out effort to pursue natural gas but you haven’t seenanything yet: The upcoming winter drilling season promises to be anall-time record high,” with most and possibly all rigs capable oftackling medium-depth to deep gas targets fully booked since earlyAugust.

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