Canadian producers are more optimistic than ever before about the future course of natural gas prices, according to an annual survey of the sector by Deloitte & Touche. While braced for oil to take a tumble, the Canadians expect gas to have a comparatively soft landing when energy commodity markets dive from their current peaks if the conflicts in the Middle East cool off enough to take out the fear factor.

Canadian exploration, production and income trust chiefs suspect oil is poised for a rapid and deep fall to levels where the 2004 average will work out to be US$31/bbl, about 25% less than the current $42 spike driven by war in the Middle East. The Canadians expect oil to settle down to an average $28 in 2005 and 2006. Natural gas is projected to retreat into a range of C$4.00 to $6.50/Mcf (US$3.30 to $4.75) at the Alberta border, leaving the top of the trading range within about 10% of the current upper limit of C$7.30 (US5.35).

The oil market continues to be perceived in Canada as prone to severe political disruptions, despite predictions by international analysts that growing Chinese demand will build a firm floor under prices. Gas, on the other hand, is more trusted as a commodity traded only in North America and liable to be in tight supplies for years before new Arctic and LNG projects have any hope of being completed. Even allowing for the wariness, the consensus on prices is still the most optimistic outlook encountered in the 12 years the Deloitte accounting firm has done the survey.

The annual poll, taken in April, surveys senior executives in a spectrum of Canadian and foreign-controlled petroleum companies of all sizes based in Alberta. Industry leaders have a record of being conservative on prices and correct on jobs and field activity, said Richard Cooper, chief of Deloitte’s Canadian energy and resources practice. And the word for the activity outlook is torrid. “Previous survey results indicate respondents have generally been accurate in predicting the outlook for employment shifts,” the accounting firm says. “Based on the (2004) responses, it looks like we can expect employment growth this year and into the next.”

Nearly three-quarters of the Canadian industry leaders expect employment growth this year and the majority are already predicting the trend will continue through 2005. The labour market shows signs of tightening up. About 40% of petroleum industry employers report encountering difficulty hiring and keeping professionals such as geologists and engineers. The number of companies reporting recruitment problems has about doubled over the past two years.

“Companies will need to carefully monitor the employment issue over the next few years,” Deloitte says. But the job market has not yet tightened up to point where wage-earners have a sellers’ market for their skills. Only 30% of employers expect to give significant salary increases over the next year.

Gas is expected to be the target for the majority of drilling and development activity in Canada’s western provinces. Despite widespread consensus among analysts, pipelines and regulators that the region’s production capacity is peaking and entering long-range decline, fully 47% of producers expect fresh reserves to be developed in the chief gas-producing province of Alberta.

Only 21% foresee entirely new discoveries in British Columbia, despite high-profile drilling successes in relatively untapped geology. The explanation for the consensus on future reserves likely lies in different industry definitions of discoveries for the two provinces. In B.C., producers are still primarily occupied with conventional drilling.

In Alberta, there is widespread belief that a breakthrough is on the horizon for a type of production which is still a technological frontier in Canada, coalbed methane. Fully half of significant producers in Alberta confide they are working on entering the new field, Cooper reported.

Only time will tell how well they succeed. Much of the effort is still in early stages and often still confidential, with the most advanced companies operating on the borderline between pilot and commercial projects while the rest are exploring for suitable coal seams and competing for land positions. The only aspect of the Canadian producer sector expected to shrink is the corporate population.

The number of firms is poised to drop because pressures are mounting on royalty trusts to take over conventional companies or make mergers among themselves or both. About 30 Canadian exploration and development companies have converted themselves into trusts, or tax-sheltered income distributors for retail investors, since the mid-1990s. More than 80% of Canadian oil and gas executives predict a wave of corporate combinations involving trusts.

They need to cut costs and acquire assets in order to keep their promises to pay reliable cash streams, Cooper said. Consolidation is expected to generate “synergies” or savings by spreading corporate overhead and administrative costs, primarily in Calgary head offices, thinner over production. The trusts also need to top up oil and gas reserves. The supplies are depleting because the trusts are committed to be low-risk ventures distributing most of their money to investors rather than spend on new drilling. The merger trend has begun, Cooper said. He pointed to spring combinations by Petrofund Energy Trust and Ultima Energy Trust, APF Energy Trust and Great Northern Exploration, and Progress Energy and Cequel Energy.

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