The Canadian natural gas resource endowment is beginning to showing its depth again as new drilling attempts to catch up with demand. Production from the western provinces has increased by 680 MMcf/d this year, according to records kept by FirstEnergy Capital Corp., an investment banking house. In a “market update,” research manager Martin Molyneaux credited 70% of the production gain to a single discovery in northeastern British Columbia, the Ladyfern find by Murphy Oil Co., Apache Canada and Alberta Energy Co (see related story this issue).

The British Columbia discovery, 80 miles north of Fort St. John but already delivering because it was within easy reach of the Alberta pipeline grid, accounts for just 12 out of about 10,000 gas wells the Canadian industry is drilling this year.

Molyneaux described the known production gains by the rest of the wells combined about 200 MMcf/d as “disappointing” in light of their high number. In effect, much of the the industry is still working overtime largely just to maintain current production levels. However, he said the reasons for the disappointment are corporate and financial rather than a symptom of resource exhaustion.

The performance results from continuing emphasis on development drilling to keep up production from established reserves. FirstEnergy calculates that only about 20% of western Canadian drilling can be classed as exploration for new gas inventories. Molyneaux said the trend reflects concentration on lowest-cost field activity in order to please the stock markets. The industry is “managing for earnings” rather than asset growth.

“Producers are still picking a lot of low-hanging fruit,” said Molyneaux. “Exploration is hard on earnings.”

The concentration on appeasing investors with wells guaranteed to make a difference on quarterly financial statements is at least becoming less pronounced in Canada than in the United States. FirstEnergy estimates that development drilling accounts for all but 10% of the 1,000-plus American rigs now active with gas as their declared target. As a result, the investment house expects the “continental” Canada-U.S. market to stay tight.

“You want to be long on natural gas,” Molyneaux said. “We don’t think we’re facing $3 prices any time soon.”

FirstEnergy’s forecasters call for gas prices to stay in a range more than quadruple their levels in the late 1990s, averaging C$7.95/Mcf (US$5.35/Mcf) this year and C$6.25 (US$5) in 2002. With gas currently accounting for two-thirds of Canadian petroleum producer revenues compared to just 17% in 1995, the investment house predicts production companies’ financial statements will continue to post “staggering numbers” as long as the energy market stays tight.

Canadian producer profits (excluding wholly-owned subsidiaries of U.S. producers such as Apache, Anadarko, Forest, Conoco and ExxonMobil) are forecast to reach the C$15 billion (US$10 billion) range this year, or double even the stellar performance as a result of high oil and gas prices in 2000 and as much as the industry netted during the entire 1990s.

The conditions are ripe for an exploration revival among companies that can look beyond quarterly financial statements. “The reinvestment potential is nothing short of staggering,” Molyneaux said. But the pressure is on for companies to fight for survival by concentrating on earnings to fend off takeover by keeping their share prices high enough to discourage bargain hunters. “Everybody out there, in our opinion, is prey and predator.”

Among the producers big enough to afford the risk of doing exploration without immediate profit gains, there are clear signs that the hunt for gas “elephants” is accelerating, especially on the Canadian industry’s northern frontiers. At a conference held by the Canadian Petroleum Society, the National Energy Board estimated 50 wells will be drilled in the Northwest Territories during the forthcoming 2001-02 winter field season, or more than double the 20 done in 2000-01. Between four and seven gas exploration wells are expected on the Mackenzie Delta, with much more drilling being foreshadowed there by 15 seismic-survey programs, or 50% more activity than during the last winter season. (Work in the Canadian Arctic is confined to the winter months, when the marshy terrain freezes hard enough to support heavy equipment).

Western and northern Canada are not the only fronts where activity is on the rise. Offshore of the Atlantic provinces, PanCanadian Petroleum Ltd. said it agrees with Ziff Energy Group that the Scotian Shelf harbours up to 50-100 Tcf. The optimists point out that current estimates of the resource offshore of Nova Scotia, 20-30 Tcf, rest on drilling results in shallow waters less than 500 feet deep.

The Canadians are forecasting “big-time exploration” offshore of their East Coast. They point to PanCanadian’s new C$1 billion (US$666 million) production project for its 2000 Deep Panuke discovery on the order of a trillion cubic feet, the company’s plans for up to five more exploration wells off Nova Scotia this year, commitments by a range of other producers to C$948 million (US$632 million) in exploration in order to obtain and keep resource leases, and work now under way on interpreting more than 10,000 square kilometers (4,000 square miles) of three-dimensional seismic surveys completed offshore of Nova Scotia over the past 24 months.

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