With optimism spreading that natural gas prices will stay firm, drilling is on the rise in western Canada, as producers set out to make supplies catch up to expanded export pipeline capacity. A barometer of field activity — periodic forecasts by a group in close touch, the Petroleum Services Association of Canada (PSAC) — has risen 5% as producers telegraph intentions for the forthcoming fall and winter drilling season with orders and contracts.

PSAC increased its projection of wells to be drilled across Canada during 2002 to 14,700 from spring expectations of 14,000. Gas drilling is forecast to account for 61% of the activity. PSAC president Roger Soucy observed that although the count will still be down from a 2001 record of 18,181 wells, the new outlook for 2002 still represents 16% more drilling activity than the 10-year average for Canada.

The strength reflects growing confidence in the North American gas market. Canadians place considerably less faith in oil prices, acknowledging that they exhibit a “war premium” generated by traders guessing about the future in the Middle East. Among industry analysts, ARC Financial Corp. chief economist Peter Tertzakian, for instance, expects the annual average oil price to drop to US$22 per barrel in 2003 from an anticipated $23.65 for 2002, with trading gyrating in a wide range of $17-$28.

Gas, on the other hand, looks to ARC likely to average US$3.05 per MMBtu (Henry Hub) this year, $3.40 in 2003 and $3.25 in 2004, with the drivers being relatively more predictable North American supply, demand and economic performance trends. ARC stands at the conservative end of the range of Canadian forecasts, along with energy stocks boutique Peters & Co. Rival investment house FirstEnergy Capital Corp. has higher targets of $3.25 for 2002 and $3.80 for 2003 largely due to expectations that even increased drilling will fail to expand supplies significantly.

While even the high end of the price expectations north of the border hardly look better than flat from an American point of view, from a Canadian perspective the outlook is strong by the standards of recent, painful history. The Canadian industry is still only in its second year of receiving prices which are reasonably comparable to U.S. benchmarks.

Prior to the late-2000 completion of Alliance Pipeline between northeastern British Columbia and Chicago, recurring gluts of “trapped gas” held Canadian prices back by as much as a $2 “basis differential” through the 1990s. The official historical record bears out the impressions of industry participants. The end has come to the bad old days of Canadians having to swallow deep discounts by selling gas on their overcrowded domestic market because they could not find export delivery capacity.

In a summer review of the continental market, the U.S. Department of Energy’s fossil energy branch observed that “the price in 2001 for Canadian supplies at the international border rose at approximately the same rate as the price for (U.S.) domestic supplies at the wellhead.” The branch pointed to records kept by the Energy Information Administration showing “the average domestic wellhead price for natural gas in 2001 was $4.12/Mcf, which was $0.43 or 11.6% more than the 2000 average price of $3.69. This compares with an average price of $4.36/MMBtu for Canadian gas supplies and about a 12% year-to-year increase in price.”

U.S.-based companies that responded to the improvements in the Canadian connection by reaching north across the border for new supplies with corporate acquisitions have begun to see rewards. Performance rankings of the top 25 gas drillers in Canada compiled by FirstEnergy include the big names in the acquisitions wave: Burlington, Devon, Conoco, Apache, Vintage, Anadarko and Calpine.

In first-quarter 2002, by FirstEnergy’s count: Burlington Resources Canada led the gas drilling pack by adding production of 90 MMcf/d, followed by EnCana Corp. (74 MMcf/d), Canadian Natural Resources (71 MMcf/d), Talisman Energy (65 MMcf/d), Devon Energy (57 MMcf/d), Conoco Canada (34 MMcf/d), EOG Resources (33 MMcf/d), Husky Energy (26 MMcf/d), Apache Canada (26 MMcf/d), ExxonMobil (22 MMcf/d) and Shell Canada (22 MMcf/d).

During 2001, the top 10 increases in Canadian gas production on FirstEnergy’s rankings were achieved by EnCana (728 MMcf/d), Burlington (472 MMcf/d), Canadian Natural (464 MMcf/d), Devon (402 MMcf/d), Talisman (259 MMcf/d), BP (234 MMcf/d), Conoco (216 MMcf/d), Husky (174 MMcf/d), Apache (157 MMcf/d) and Petro-Canada (126 MMcf/d).

FirstEnergy says “it is clear companies have proven that there continues to be gas to be discovered, with at least 25 wells greater than 11.5 MMcf/d found in each year. Initial results look promising.” The investment house suggests that the Canadian gas industry is still only beginning to recover from its 1990s lean times, when poor prices caused drilling to focus on the lowest-cost, lowest-risk targets available.

“Exploration still suffers from a lack of good personnel, a desire for the quick fix of development and an unwillingness to lose money on the dry holes that come with actually looking for oil and gas.” FirstEnergy said its surveys show “things are getting better on the exploration front of 2000, when only 13.6% of wells were exploratory and the industry had a 92% success rate. In the first three months of 2002, exploratory wells formed 16.1% of the total.”

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