While current Canadian natural gas prices have dropped, officials who take a longer view described the nation’s natural gas sector as poised for lasting growth, after weathering a spell of turbulence this summer. Natural Resources Canada, in an annual review of the continental gas market, projected further growth of 25% in exports to the United States to 4.4 Tcf per year by 2010.

The outlook calls for total annual Canadian production to rise 32% to 7.9 Tcf by the end of the decade. The federal energy department issued its report as Canadian gas trading took a sharp turn for the worse.

FirstEnergy Capital Corp. called prices outright “slammed” between June 27 and July 3 when the spot price at the AECO trading hub lost 45% of its value to hit a five-year low of C$1.35/Mcf (US$0.90). The benchmark traded as low as C$0.53 (US$0.35).

That slump was blamed on a combination of poor liquidity or low volumes of trading activity during the Canada Day holiday period, reduced demand for power plant fuel due to an abundance of low-cost hydroelectric generation in export markets and a temporary gas surplus.

Natural Resources Canada observed that immediate market conditions remain ripe for similar periodic setbacks this year. Gas markets continue to struggle to make a comeback from the effects of the 2000-’01 price spike and supply scare coupled with a mild ’01-’02 winter that added up to an estimated 5% shrinkage in North American demand last year. This was aggravated by a drilling rush that raised production capacity by 1.9% in the United States and 1.7% in Canada. Industrial consumption, including gas-fired power generation, dove sharply as operations switched fuel, or in some cases shut down.

This summer’s gas market is also depressed by relatively full storage facilities across the continent, drying up an annual source of demand.”Given North American gas storage levels on April 1, 2002, only 1,844 Bcf must be injected into storage in order to reach 3.5 Tcf by Nov. 1. This compares to 2,750 Bcf which was required as of April 1, 2001. ‘Storage demand’ will be a lot less this summer than in previous years. Storage demand for the summer of 2003 could be entirely different.”

The new industry offshore of Nova Scotia accounts for the lion’s share of Canadian production growth anticipated by the federal government’s industry observers. East Coast gas output is expected to triple into a range of 1.7 Bcf/d.

“Western Canada Sedimentary Basin (WCSB) production in recent years has continued to increase, but the percentage increase is a bit less each year,” Natural Resources Canada observes. From a long-range average of 2.1%, the annual growth rate in western Canadian production dwindled to 0.7% in 2001.

To keep up with demand and pipeline capacity, the pace of field activity has accelerated smartly. As of last year, the western Canadian industry drilled gas wells at a rate of 1,000 per month, compared to 300 in 1997.”The WCSB appears to be at the stage the U.S. was in during the late 1970s, when U.S. production began to flatten out.”

The Canadian government’s gas observers suggest that no lasting damage has been done to the forces driving long-range growth, provided supplies can be maintained. Gas-fired electricity generation, especially, is expected to keep on spreading.

Natural Resources Canada says that when economic expansion and increases in demand for power resume, “gas-fired generation is expected to dominate new capacity additions, as these new units will replace inefficient nuclear plants and less environmentally friendly oil- and coal-burning facilities.”Dam-building is rated as unlikely to make a big comeback as a mainstay of new power development due to environmental obstacles and the unreliability of weather patterns required to keep reservoirs full.

“Although gas price volatility and the collapse of Enron have raised some concerns, competitive electricity markets will still tend to favor more efficient, less capital-intensive natural gas as the fuel of choice for power generation.”

Natural Resources Canada also stresses that its annual gas market reviews have a record of erring on the conservative side of forecasting, with a 12-year pattern of understating growth on the horizon. The government department takes into account only completed pipelines and projects well advanced through the regulatory process. This year’s review, for instance, makes no attempt to forecast northern pipelines or gas extraction from coal seams, while noting that both stand out as possibilities by 2010.

The trouble on the Canadian end of the gas market also looks temporary in the long-range view of FirstEnergy, a Calgary-based investment house that specializes in oil and gas. In a mid-year review of the industry,the firm observed that an “all-out gas drilling effort” in 2001, when 11,000 wells were completed in western Canada, yielded total production growth of only 500 MMcf/d. By FirstEnergy’s count, virtually all the capacity increase was owed to one discovery in northeastern British Columbia called Ladyfern. Without that stroke of luck — shared by a range of firms such as EnCana, Apache and Murphy — FirstEnergy calculated western Canadian production would have declined by 175 MMcf/d so far this year.

The firm suspects that as the Ladyfern wells hit peak output and decline, while the drilling pace slows down compared to 2001, total western Canadian productive capacity will stay flat or drop by 200 MMcf/d and possibly more this year. “Another supply crunch may be just around the corner, and so are higher natural gas prices.”

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