Costs of new Canadian natural gas wells are dropping and the improved efficiency is slowing down deterioration of supply activity, a field contractor group says.

After the first systematic survey of changing industry conditions, the Petroleum Services Association of Canada (PSAC) reports that well cost reductions average 13% across Alberta, source of about four-fifths of the nation’s production.

Depending on regions of the Texas-sized province where the measurements are made, the decreases range from 8% to 17%, PSAC reports. Drilling wages were cut by about 10% months ago. The biggest new savings are on steel casing and tubing, fuel and rig contract charges.

The cost reductions prompted the 270-company association to make only a 5% downward adjustment to its spring drilling forecast.

PSAC’s annual summer drilling projection calls for 9,500 wells across Western Canada this year, down 500 from expectations of 10,000 as of April. The new outlook is 45% below the industry’s 2008 supply activity. The 2009 well count is projected to be down 46% in Alberta to 6,265, down 45% in Saskatchewan to 2,275, and down 18% to 690 in British Columbia.

“We believe the decrease in costs will be enough to sustain a certain degree of activity, even in the face of continuing low natural gas prices,” PSAC President Roger Soucy said.

But supplies are forecast to be badly dented even if the industry manages to halt the drilling slide. In a research note last Friday, FirstEnergy Capital Corp. estimates that 2009 average production will drop by about 1 Bcf/d, or 6%, to 14.7 Bcf/d.

Alberta’s Energy Resources Conservation Board (ERCB) has made similar supply projections due to natural depletion of aging wells on top of the effects of hardship prices in a range of US$3-4/MMBtu. The ERCB has forecast a 6% production drop for 2009, followed by an annual average 4% decline for the foreseeable future even if markets and drilling begin to recover in 2010.

FirstEnergy estimates monthly average Western Canadian production of 14.8 Bcf/d in June was the lowest since late 1997. “This represents a stunning 2.8 Bcf/d decline from the all-time peak production reached in April 2006,” says the investment house, which makes a specialty of tracking gas supplies in detail. “This will easily dwarf the 0.64 Bcf/d loss recorded in 2008 and will be the largest single-year decline for natural gas production on record in Canada.”

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