Canadian exporters are signaling that National Energy Board Chairman Ken Vollman got it right earlier this month when he warned the United States against relying on Canadian production to satisfy growth in American demand for natural gas.

Canadian gas exports to the U.S. have fallen sharply despite rising gas prices at the border and the need to refill storage facilities — forces that used to drive increases in production to the extent that pipeline capacity was available.

Out on the markets, the latest NEB export count, covering February heating-season gas demand, showed a 7% drop in volumes shipped to the U.S. to 291 Bcf compared to 313 Bcf in the same month of 2002. It was the second consecutive drop in monthly export shipments. In January, Canadian deliveries to the U.S. slipped by 5.7% to 312 Bcf compared to 330 Bcf during the first month of 2002.

Among the major export destinations, Canadian shipments to California fell by 40% year-over-year in February to 24.7 Bcf. Deliveries to the Pacific Northwest were off 38.7% to 31 Bcf. Exports to the Midwest rose 8.2% to 138.2 Bcf, and Canadian sales to the Northeast increased by 5% to 97.1 Bcf.

The price fetched by gas at the international boundary rose in both months. In February exports averaged US$5.45 per MMBtu, up by 13% from US$4.81 in January and by 82% compared to US$2.64 during February of 2002. This January’s average export price of US$4.81 was 19% higher than the December performance of US$4.03 and 54% better than the US$2.61 received in January of 2002. Prices were up in all export destinations in both January and February.

The NEB compiled the monthly gas export numbers after Vollman delivered his supply warning earlier this month to an international audience at the annual meeting of the Canadian Association of Members of Public Utility Tribunals (see NGI, May 12). His warning was accompanied by an invitation to the industry from Vollman and the chairmen of the NEB’s counterparts from the U.S. and Mexico, Pat Wood of the Federal Energy Regulatory Commission and Dionisio Perez-Jacome of the Comision Reguladora de Energia. The agencies said they stand ready to collaborate on providing the most favorable regulatory environment possible for international supply projects including Arctic pipelines and liquefied natural gas development.

Vollman also observed that the tightening supply-demand balance appears to be only partially understood. The developing problem with market fundamentals continues to be masked by high prices and revenues that generate strength in the financial community’s favorite barometer of industry health, corporate profits. EnCana Corp. alone, as Canada’s top gas producer, posted first-quarter 2003 earnings of C$1.2 billion (US$920 million).

In January and February combined, Canadian gas export revenues fueled record first-quarter profits among producers by hitting US$3.1 billion – a 94-per-cent jump compared to US$1.6 billion in the first two months of 2002.

Canadian industry analysts believe the price and revenue increases are at least partly owed to the apparent inability of gas producers and exporters to raise deliveries in response to healthy demand. One result has been the emergence of gas as a premium-priced energy source compared to oil.

For decades, supply surpluses and pipeline capacity shortages held the value of Canadian gas down to a rule-of-thumb standard that pegged gas as worth 10 MMBtu per barrel of oil. International pipeline expansions, export increases and the end of the surplus “bubble” allowed gas to move up to an energy-equivalent value of six MMBtu per barrel of oil at the end of the 1990s. The emerging scarcity has left the continental market currently valuing natural gas at about 4.6 MMBtu per barrel of oil.

Although the changing value relationship between the energy sources has prompted some Canadian analysts to warn that “downside risk” is showing for gas, others maintain the traditional yardstick no longer applies.

Forecasters who believe gas prices will stay high point out that competition between the fuels is limited to big industrial energy users that can make switches quickly and likely have already.

FirstEnergy Capital Corp.’s forecasts call for no repetition of the gas-price slump that followed the last spike during the winter of 2000-01. The Calgary investment house points to developing contractions in supplies in both Canada and the U.S., reduced inventories of competing oil-based fuels, steadily increasing reliance of power markets on gas-fired generating stations and droughts that have reduced hydroelectric capacity.

FirstEnergy, after surveying first-quarter pipeline receipts, suspects western Canadian gas production will shrink by as much as one billion cubic feet per day or five% to six% this year. Any erosion will be felt across the continent. About 60% of western Canadian production is exported and accounts for 15% of total consumption in the U.S. consumption, where regions with direct connections rely on Canada for up to four-fifths of their supplies. FirstEnergy also forecasts a 2003 U.S. production decline of one to 1.5 billion cubic feet per day.

Although rival Peters & Co. is less pessimistic about supplies and more wary of competition between fuels, it too says its own studies “strongly suggested that Canada will not be compensating for any supply shortfall in the U.S. market” for natural gas.

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