Barring a surprise outbreak of increases in productivity, Canadian natural-gas exports to the United States are headed for a second straight year of slowing down.

Pipeline deliveries to the U.S. slipped by 2% for the first nine months of the current contract year ending Oct. 31, confirming that a Canadian growth streak which began in the mid-1980s has been broken.

Records kept by the National Energy Board are showing the second consecutive sustained drop in export volumes. Shipments in the nine months that ended July 31 were 2.695 Tcf compared to 2.746 Tcf in the same period a year earlier. The nine-month performance in 2001-02 was in turn down by 5.3% compared to 2.9 Tcf in the first three-quarters of the 2000-01 contract year.

Exports previously grew consistently until the reversal of 2001-02 inspired widespread forecasts of a long-range decline in the productivity of aging western Canadian gas fields and helped strong prices light a fire under Arctic gas proposals. The trade set 14 consecutive annual volume records, with exports growing quadrupling in 1987-2000 to account for nearly 60% of total Canadian production in the peak contract year of 2000-01.

The erosion of export volumes has continued despite sharply improved prices and an abundance of long-distance delivery capacity since the Alliance Pipeline went into service three years ago.

Prices fetched by Canadian exports were up by 84% to an average of US$5.11/MMBtu at the international boundary for the first nine months of the current gas-contract year, compared to US$2.77/MMBtu in the same period of 2001-02.

Total gas-export revenues rose 80.4% to US$13.86 billion in the first three-quarters of the 2002-03 contract compared to US$7.68 billion during the same period a year earlier.

Measured in the Canadian dollar, the gain was slower due to the rising strength of the currency against its U.S. counterpart — but the improvement was still large. Total gas-export revenue in Canadian funds for the first nine months of the current contract year was C$20.39 billion, up 69% compared to C$12.08 billion for the same period of 2001-02.

Sales volumes rose in two of the principal destinations for Canadian gas exports. Deliveries increased by 3.2% to the middle-western U.S., reaching 1.2 Tcf in the first nine months of the 2002-03 contract year compared to 1.16 Tcf during the same period a year earlier. Shipments to the northeastern U.S. rose 5.7% to 856.8 Bcf from 810 Bcf.

The increases were more than offset by declines in the other two main Canadian export destinations. Shipments to California fell by 12.2% to 347.8 Bcf in the first three-quarters of the current contract year compared to 395.9 Bcf during the same period of 2001-02. Deliveries to the U.S. Pacific Northwest went down by 20.6% to 293.5 Bcf from 369.6 Bcf.

The two growth regions for sales volumes were also the best performers in prices. Gas exports to the middle-western U.S. fetched an average US$5.15/MMBtu during the first nine months of the 2002-03 contract year, up 90% from US$2.71 for the same period a year earlier. Shipments to the northeastern U.S. averaged US$5.45, up 76% from US$3.10.

Prices for gas exports to California in the first three-quarters of the current contract year averaged US$4.61/MMBtu, up 84% from US$ 2.50 a year earlier. Canadian deliveries to the U.S. Pacific Northwest averaged US$4.54/MMBtu, up 78% from US$2.56/MMBtu.

The slippage in the volume of gas exports to the U.S. is not a case of production being diverted to Canadian markets. A scorecard kept by the natural gas branch of Natural Resources Canada and Statistics Canada shows a modest decline in domestic demand since last winter, with consumption off by 0.36% during the latest reported month of June. The federal energy department’s records show that total Canadian marketable gas production was down by 4% this June compared to the same month a year earlier.

Large questions raised by the export and productivity trends remain unresolved. Numerous studies are under way into whether the Canadian resource endowment is running down, or whether the declines result from a “gas-in-time” approach that has concentrated drilling in areas of low-cost, shallow and small reserves since the early 1990s.

As in the United States, in Canada, the price effects of the supply tightness are hotly debated. However, most Canadian analysts agree to disagree with the U.S. Energy Information Administration’s forecast of a sharp decline on the order of 20% in gas prices in 2004.

In the Canadian gas capital of Calgary, FirstEnergy Capital Corp. predicts the drop will be more like 10% to an annual average US$4.75/MMBtu next year. The more conservative Peters & Co. investment house lefts its 2004 price forecast unchanged at US$4.50.

FirstEnergy forecasts a 2.5% decline in Canadian supplies this year followed by continuing erosion in 2004 and 05. The Peters analysts, pointing to accelerating activity on geographic and technical frontiers such as northeast British Columbia, are not so pessimistic about supplies, but add that prices will have to stay at a “base” level of US$3.00-3.75/MMBtu or higher for the new drilling and development activity to be sustained.

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