Canada’s exploration and production (E&P) companies have begun to focus more on low deliverability, tight gas plays to help overcome natural gas declines, and share a consensus that output may be difficult to maintain without more non-conventional resources and the Mackenzie Delta pipeline, according to a report issued Thursday by Lehman Brothers analysts.

Thomas R. Driscoll and Philip R. Skolnick met in Calgary recently with the management teams of eight of the country’s largest producers, which account for about 46% of the total gas production. Their review found that gas production from the eight — Anadarko Petroleum Corp., Apache Corp., Burlington Resources Corp., Canadian Natural Resources, Devon Energy, EnCana Corp., Nexen Inc., Petro-Canada, Suncor and Talisman Energy — likely will fall an average 1% this year.

However, the producers are beginning to look at other gas resources in the vast country. “Companies have historically focused on conventional, high deliverability natural gas plays in Canada, as these are the easiest reserves to go after. However, the availability of these types of prospects has diminished and production is in high decline. As a result, the industry has shifted its focus in Canada toward non-conventional plays, particularly basin centered (tight gas sands) and coalbed methane plays,” facilitated by technological innovations.

“EnCana illustrated for us that significant amounts of natural gas reserves still exist in North America within various non-conventional plays,” the analysts said. “However, each play requires a different level of technology to develop. At the top of the triangle (the narrowest part) are conventional sources, which require the lowest level of technology extract but also have the least amount of recoverable reserves.

“At the bottom…(the widest part), are gas hydrates, which are believed to contain the largest amount of reserves, but also require the highest level of technology to develop. The basin centered and coalbed methane plays are at the midpoint of the triangle; and as technology improves, the industry is likely to continue to move down this triangle.”

Many of the companies consider the 2008 target date for start-up of the “long-awaited” Mackenzie Delta pipeline as “aggressive,” the analysts noted. Regulatory agencies, additional native groups outside of the Aboriginal Pipeline Group and/or other individuals “may step in and delay the regulatory process or cause a change in the proposed route, possibly causing an increase in costs or even cancellation of the project,” they noted. The pipe also could be delayed because the Mackenzie Delta is a “winter-only access area, and missing one winter would delay completion by a year.” Labor shortages also could hinder the building and increase total costs.

Management of most of the E&Ps also noted the difficult time they are having in competing with Canadian royalty trusts in the acquisition market because of the trusts’ lower cost of capital. “While royalty trusts generally do not explore, the increased competition for acquisitions between Canadian royalty trusts and E&P companies could mean that either the trusts are raising their risk profiles or E&Ps are lowering theirs (and accepting lower returns as a result), due to a lack of exploration and exploitation opportunities.”

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