EnCana Corp.’s management team said last week the turn to colder weather in the past month is a sign that some of the company’s natural gas-directed drilling soon will be back on track.

Higher-than-expected service costs, which averaged about 15% more than in 2005, forced EnCana to delay some of its drilling projects toward the end of the year (see NGI, Oct. 30, 2006). Still, the Calgary-based producer managed a solid 4% gain in 4Q2006 natural gas production. Key resource plays, concentrated over 27 million net acres of the gas-prone Rocky Mountain fairway and Midcontinent, boosted production 12% year-over-year.

“We achieved all this in a tough operating environment,” CEO Randy Eresman said Thursday in a conference call. He called last year “transformational,” as EnCana unloaded its offshore assets and foreign investments to refocus its exploration onshore in the United States and Canada. EnCana is “essentially now a pure North American producer focused on unconventional natural gas and integrated oilsands.”

Production, which is nearly 80% weighted to gas, saw its biggest gains coming from coalbed methane production in central and southern Alberta, Bighorn in west-central Alberta, Cutbank Ridge in northeast British Columbia and in the Barnett Shale around Fort Worth. The emerging in-situ oilsands production from its Foster Creek steam-assisted gravity drainage project reported a 27% jump in output last year.

However, service costs weighed on the bottom line, and EnCana officials don’t see a big turnaround in expenses coming anytime soon.

“We reviewed the actual inflationary impact, and cost inflation [in 2006] averaged about 15%, which was about 5% higher than our original budget,” said CFO Brian Ferguson. “In 2007, we expect these inefficiencies in supplies and labor to ease somewhat.” This year, with the “inflationary pressures in United States, we believe [costs] will be on the higher side of EnCana’s guidance, in the 10% cost range overall.” He said EnCana in 2007 is assuming a 5% rate of inflation on its capital costs and a 10% hike in operating costs.

Through the drillbit, EnCana replaced 197% of its reserves last year, and it increased its North American proved reserves by 9% to 19.2 Tcfe. This year, gas production is expected to rise about 3% (9%/share based on expected share purchases), to 3.46 Bcf/d. Total production in 2007, prior to the allocation of oilsands volumes to ConocoPhillips as part of the heavy oil integration project, is expected to rise 4% over 2006. With the creation of the integrated oilsands business, EnCana expects 2007 total production to be about 4.28 Bcfe/d, flat from 2006.

Eresman last week also reaffirmed EnCana’s commitment to developing the gas reserves in the Deep Panuke field offshore Nova Scotia. The field, he said, “is a keeper for us.” EnCana submitted a Development Plan Application with Canadian regulatory officials last November to restart the project (see NGI, Nov. 13, 2006), and preliminary hearings on the revised plan are expected to begin in early March.

Eresman, who spoke with reporters about the project during a conference call, said EnCana had no plans to sell or abandon the offshore gas project.

“It is a project we are continuing to proceed with, and we hope to have that development on stream in the next number of years,” Eresman said.

EnCana first applied to develop Panuke in March 2002, but limited success forced it to request a regulatory timeout and then to withdraw the application (see NGI, Feb. 17, 2003). Following an internal reassessment, EnCana last summer completed an Offshore Strategic Energy Agreement with Nova Scotia that established the framework for a do-over (see NGI, July 3, 2006). In the revised application, EnCana estimated Panuke production eventually would reach 300 MMcf/d, a 25% reduction from its original forecast of 400 MMcf/d.

The initial well program offshore Halifax would consist of completing four previously drilled production wells to prepare them for production, drilling one new injection well in Margaree and one new production well in Panuke. Up to three new production wells could be drilled after first gas in Cohasset, Deep Cohasset, Panuke or Margaree. The main project components include a Mobile Offshore Production Unit, subsea flowlines and umbilicals, subsea wells and an export pipeline. If the exploration program is successful, EnCana anticipates first gas production could be in late 2010. The project’s expected life range is eight to 17.5 years, EnCana noted.

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