Not only has Canadian natural gas production peaked, but it has been declining at an annualized rate of 5% over the past three months, and gas imports to the United States could be down an estimated 4% (0.5 Bcf/d) through 2003. Still, opportunities exist for exploration and production companies, according to analysts.

Recent data indicate that the Canadian gas supply declines may be higher than expected, said Raymond James analysts J. Marshall Adkins and James M. Rollyson in their latest “Energy Brief.” Canadian gas production “will likely be part of the problem rather than part of the solution” because the major pipelines exporting gas to the United States “have shown accelerated declines in field receipts over the past three months.”

In fact, they noted, Canadian production “has declined steadily since peaking in January 2002, and is not showing any signs of improvement despite the sharp increase in winter gas drilling.” Currently, Canada supplies almost 16%, or 10.5 Bcf/d of U.S. natural gas consumed, compared with 12 years ago, when Canada was supplying about 9%, or 4.7 Bcf/d of U.S. gas.

To prove their point, the analysts plotted monthly Nova and Alliance gas pipeline field receipts versus Canadian gas well completions. The combined receipts account for about 85% of all gas piped into the United States. “Initial observation shows that Canadian gas field receipts from these two systems peaked in early 2002 at approximately 12.9 Bcf/d, before declining steadily over the next year.”

The more important trend, however, is what has occurred between March and May 2003. “Although gas field receipts had fallen by almost 0.4 Bcf/d since peaking in January 2002, Canadian gas production has fallen a whopping 0.2 Bcf/d since this February. If this decline were to continue for the rest of the year, it would represent a 4% to 6% reduction in Canadian gas supply in 2003.”

The declines were occurring “despite the fact that the average number of 2002 Canadian gas well completions was over 60% higher than 1999,” said analysts. “This data not only adds further credence that gas production has peaked, but also that continuing declines appear more likely.” Even assuming that Canada achieves “record levels of gas drilling through this summer,” they estimate imports to domestic markets would be down 0.5 Bcf/d, or 4% through the year.

Longer term, they said, declining U.S. and Canadian gas production, combined with the current low gas inventory, “continue to point to higher sustainable average natural gas prices over the next several years. It is these higher sustainable gas prices that should continue to drive increasing [exploration and production] cash flows, more drilling activity, higher oilfield service earnings and ultimately, higher energy stock prices.”

Despite reports that Canada’s natural gas production is continuing to decline, Lehman Brothers found there are still “attractive opportunities” that should help individual exploration and production (E&P) companies to grow.

In Lehman’s latest E&P update, analysts Thomas R. Driscoll and Philip R. Skolnick note that the likelihood of Alberta maintaining production is “doubtful, as initial production rates are lower and decline rates are steeper for new wells.” The analysts estimate that Alberta natural gas production, which comprises about 80% of Canada’s total, fell an estimated 3.5-4.5% in the first half of 2003 compared with 2002. Overall, they estimate total production also will decline 2-4% this year, mirroring Ray James’ analysts.

“We estimate that natural gas production in Alberta peaked in late 2001 at around 14.3-14.5 Bcf/d and is down an estimated 7% to 8% since then,” said Driscoll and Skolnick. Using official Canadian numbers, they note that “it will be difficult to maintain natural gas production levels in Alberta, as initial production rates are lower and decline rates are steeper than in the past.”

However, the analysts said that Canadian natural gas opportunities remain “very important” to several larger, independent producers. Reviewing eight independents that Lehman follows, analysts found that Canadian gas accounts for an average of between one-quarter and one-third of total production. The companies — Anadarko Petroleum Corp., Apache Corp., Burlington Natural Resources, Canadian Natural Resources, Devon Energy, EnCana Corp., Nexen Inc. and Talisman Energy — together produce about 50% of total Canadian natural gas and expect to spend roughly US$6 billion of capital in Canada through this year.

Anadarko, based in Houston, controls 3.8 million net undeveloped acres, and in the first quarter, net natural gas production from its properties averaged 389 MMcf/d (after royalties), or almost 15% of the company’s total oil and gas production volumes. Apache, also based in Houston, continues to view Canada as an important production component, with gas production averaging 309 MMcf/d, also 15% of its total oil and gas production in the first quarter of this year.

Meanwhile, Burlington, said analysts, became a major Canadian presence after it acquired Canadian Hunter in late 2001. In Canada, Burlington focuses on long-life gas plays that give it a resource of multiple low-to-moderate-risk opportunities. In the first quarter, the Houston-based independent produced about 852 MMcf/d in Canada, “making it a major producer in the country.” And at Canadian Natural, the country’s third largest gas producer, there was another 925 MMcf/d, or 41% of its total oil and gas production in the first quarter. Canadian Natural also has about 800 potential drill sites identified, some ready for drilling, and is now conducting technical work to ready itself for future exploration.

At Oklahoma City-based Devon Energy, its place as a major Canadian producer began with its acquisition of Anderson Exploration in late 2001, said analysts. In the first quarter, Devon produced 700 MMcf/d in Canada, or 24% of its total oil and gas production. Its holdings include about 8 million net undeveloped acres in the Western Canadian Sedimentary Basin and another 2 million net undeveloped acres in the frontier of northern Canada, and it is the largest holder of exploratory acreage (1.8 million net) in the Mackenzie Delta/Beaufort Sea area. The company plans to spend US$500 million this year to drill 800 gross oil and gas wells.

EnCana, the largest gas producer in Canada, produced an estimated 1.7 Bcf/d in the first quarter. Focusing on “resource” plays, EnCana’s strategy is to acquire the rights to acreage from private companies that produce gas from deeper formations. For instance, EnCana owns an average 90% working interest in the Greater Sierra Region now, and also holds a dominant position in the infrastructure of the region as well. Overall, EnCana holds about 15.5 million undeveloped acres, and plans to spend US$1.8 billion this year for E&P.

Another producer, independent Nexen, isn’t known for making Canadian gas opportunities, said analysts, but it has substantial acreage in “high potential areas” of northeast British Columbia and the foothills of Alberta. For longer-term growth, Nexen is testing coalbed methane potential, and in northeast British Columbia, it is targeting deep gas prospects.

Finally, Talisman, based in Alberta, produced an estimated 635 MMcf/d, or 30% of its total production in the first quarter, from acreage focused in the Foothills area. Its strategy is to focus on deeper plays where prospect sizes are larger than average, and its Foothills production averaged 125-130 MMcf/d in late April (an increase of 9% from the previous year).

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