An economic think tank predicts a rosy future for Canadian natural gas, but in the industry all bets are off on when a turn for the better might come.

The Conference Board of Canada, using a theory of energy price convergence in an outlook report on gas, forecasts “significant gains” for revenues that mean “profits will rebound nicely” when all results are in for 2007. The theory maintains the money value of gas will catch up to its energy content, eventually making an MMBtu worth one-sixth the price of a barrel of oil.

“Historically, the price of natural gas has averaged less on an energy-equivalent basis than that of crude oil,” the economists admit. “However, fundamentals would suggest that oil and gas are interchangeable as inputs for industrial and utility demand. As this price differential persists, more and more companies will choose to switch their energy choice in favor of natural gas rather than crude,” the board predicts.

The result is a forecasting model that “assumes these two prices will gradually converge on an energy-equivalent basis over time.” As a result, “the Alberta plant-gate price of natural gas will rise by 6.2% per year on average.” By 2011, the annual average for the Canadian benchmark will rebound from the low of C$6.50 per gigajoule (US$6.48/MMBtu) hit in 2006 — down 18% from 2005 — to C$8.40/ GJ (US$8.38/MMBtu), the board predicts.

The theory, popular before the spread between oil and gas energy-equivalent pricing widened over the past few years, has yet to gain enough currency to rate any mention in the industry. Second quarter statements of Canadian companies are studded with cases of reduced revenues, drilling budget cuts and conspicuous refusals to predict recovery times.

Peyto Energy Trust, for instance, followed the example of Canada’s second-biggest gas producer, Canadian Natural Resources Ltd., by making a second-quarter cut of 81% in its reserves finding and development spending. Peyto, a Canadian industry comer with a large inventory of drilling targets, described the order of the day until further notice as conserving the bank of prospects while maintaining a “disciplined strategy of reduced capital investments, while awaiting lower costs and improved rates of return.”

Calfrac Well Services Ltd. — a barometer of the producer community’s mood, as a major supplier of reservoir fracturing services — cited “an overall decline in natural gas drilling activity throughout the Western Canada Sedimentary Basin.” Rather than wait for a rebound in prices and activity, Calfrac said it has moved into gas field service markets in the United States, Russia and Mexico. “The lower activity levels experienced in Western Canada during the first half of 2007 will continue throughout the remainder of the year and, potentially, beyond,” the company added.

Canadian markets and prices are going to become weaker before they grow stronger, predicted FirstEnergy Capital Corp., a Calgary financial house that makes a specialty of tracking gas in considerable detail. A glut is developing that is liable to drag Canadian prices back to depressing lows below C$4/Mcf (US$3.80) hit last fall, FirstEnergy observed.

Canadian gas storage is already 88% full as of July 31, a level the industry did not reach until the fall last year. The performance points to “what seems to be an inevitable approaching price collapse,” FirstEnergy warned. “As a last resort the (Canadian) industry may have to start facing well shut-ins, at least for a short period of time prior to the onset of the heating season,” the investment house said.

“Given the vast uncertainties of the weather, additional LNG supplies from overseas in 2008, and better U.S. domestic supply performance, we remain highly cautious that any lasting price strength will materialize in 2008.”

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