As prospects for a quick infusion of new reserves from the Arctic fade, Canadian’s are expecting higher gas prices and markets are encouraging them to believe they are right with their diagnosis that supplies are tight.

As the Mackenzie Gas Project’s aboriginal relations headache worsened, Canadian gas prices jumped, and industry analysts in Alberta issued bullish forecasts.

At EnCana Corp.’s AECO trading hub in southeastern Alberta, prices jumped by C$0.98 cents (US$0.76) or 18% last week to C$6.49 (US$5.06) in just 48 hours.

The early fall price gains only started gas on its way towards catching up with oil, observed analysts such as Richard Wyman of Canaccord Capital Corp. and Martin King of FirstEnergy Capital Corp. Breathtaking jumps by crude into the US$50-per-barrel-range left gas with room to climb much higher. A widespread Canadian rule of thumb calculates the potential for gas prices by considering how markets value the two fuels on a common yardstick of energy content in virtually universal use by the industry north of the international boundary: boe or barrels of oil equivalent.

On the energy content yardstick, which has become the Canadian standard for measuring and comparing corporate productivity, 6 Mcf of gas equals one barrel of oil. Over the summer, a value gap widened until a barrel of oil fetched nine times as much as one Mcf of gas.

Gas prices will catch up to the increased value of oil as heating season arrives and stay high as markets realize supplies are tight, said Wyman Martin King. As measured by fundamentals of supply and demand, little practical difference is seen between oil and gas. The main difference from the commodity market point of view is that gas will not be affected by politically-inspired global supply scares until tanker deliveries of liquefied natural gas capture a much larger share of the North American market.

By historical standards of the Canadian industry, even the flat-to-declining gas prices of this summer were strong. Gas wells account for about 70% of the industry’s record pace of field activity this year, said Don Herring, president of the Canadian Association of Oilwell Drilling Contractors.

High levels of field activity throughout the Western Canadian Sedimentary Basin underline realities on the supply side of the gas market. No knowledgeable observers, including the Alberta Energy and Utilities Board and the National Energy Board, expect even record amounts of drilling to generate significant increases in Canadian gas supply. Although exploration is reviving on the “near frontiers” of deep and remote deposits along the foothills of the Rocky Mountains, most activity centers on shallow drilling for ever smaller reserves in established producing areas. The combined result of both the new exploration and the big crop of exploitation wells is expected to be either flat supplies or at best a marginal improvement in deliverability.

Cool weather during July and August lulled gas markets into forgetting this new Canadian reality and a false sense of security, the analysts say. In the absence of heat waves, there were no air-conditioning season spikes in demand and prices for gas as power plant fuel. Gas storage facilities were topped up in Canada as well as the United States.

Fall and winter cold snaps will burn off stored inventories and remind markets no significant additions to supplies are being made in Canada or the United States, the analysts suggest.

King predicted gas prices will average a healthy US$6.25/Mcf in 2005, or one-sixth of FirstEnergy’s forecast for oil of US$38 per barrel. The gas forecast could well turn out to be too conservative unless the weather is exceptionally mild this fall and winter, King added.

Gas has the potential to spike repeatedly to US$9 or $10 in the next few years, as growing demand overtakes flat production before the industry can add new supplies from the Arctic or build new tanker terminals, Wyman said.

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