On an international natural gas market turned upside down by the fall of the American dollar, Canadians are calling US$100/bbl oil nothing to get excited about except as potentially bad news.
“The sky-high loonie (Canadian dollar) is sending shivers down the spines of Canadian exporters, and for good reason,” said a commentary by TD Bank Financial Group, a major participant in the energy industry. The gas industry is no exception.
The steep rise of the loonie (named after the iconic bird image engraved on Canada’s $1 coins) against the American greenback this year lopped about C$3/Mcf off Canadian gas prices, estimated Don Herring, president of the Canadian Association of Oilwell Drilling Contractors.
At exchange rates that prevailed throughout the 1990s and until recently, Canadians gained $1.30 to $1.40 in their currency for every $1.00 increase in the U.S. dollar value of gas and oil. After this fall’s about-face by international financial markets, Canadians get as little as 90 cents for every $1 change in the U.S. dollar value of energy commodities. Prices for all Canadian production, whether exported or consumed domestically, continue to track international levels expressed in American dollars.
The trends effectively leave the Canadian gas industry spending bigger Canadian dollar costs to develop supplies fetching smaller Canadian dollar prices.
The relative strength of the Canadian dollar is credited largely to the country’s stature as a rare hotbed of increasing oil production. The trend has been showing since oil broke through US$50 a barrel about two years ago. The energy event also marked an initially gradual start to the Canadian dollar’s rise from its former standard trading range of US60-70 cents.
New outlook reports by ExxonMobil Corp. and the International Energy Agency repeated widespread consensus predictions that Alberta’s oilsands will for decades to come generate the greatest growth in supplies outside the Organization of Petroleum Exporting Countries.
Oil’s repeated flirtations with US$100/bbl left Herring cold. “It doesn’t make any difference. That’s the disturbing part,” said the voice of Canadian drilling contractors, who are the first casualties of ill winds on energy markets.
Outside the oilsands, gas is the target of most Canadian industry activity. Barring a recovery strong enough to move prices up significantly in enlarged Canadian dollars, CAODC predicts western Canadian drilling will drop to 13,735 wells in 2008 — 16% fewer than a projected 16,393 wells this year and down 38% from 22,298 wells in 2006.
An oil breakthrough beyond US$100/bbl could even do more harm than good, and not only by worsening the exchange rate flip-flop that has Canada’s dollar at times trading at more than US$1.10, Herring said.
Triple-digit oil could do more harm than good by deceiving the public and politicians in Alberta, source of about four-fifths of Canadian supplies, into thinking the industry can afford natural gas royalty hikes proposed by Premier Ed Stelmach, Herring said. The planned revenue overhaul as of 2009 remains a source of hot debate, both between industry and the provincial government and in a provincial legislature session currently under way.
No matter how the royalty fuss turns out, FirstEnergy Capital Corp. observes “natural gas drilling activity remains very soft and is expected to stay that way for the rest of this year and for all of 2008.”
Western Canadian supply effects have been limited so far — to a loss estimated at 420 MMcf/d down to 16.3 Bcf/d — only because the industry is “high-grading” or drilling its most promising targets first, the investment house said in a research note. “We believe that natural gas supply in Western Canada is now at a tipping point in terms of heading to drastically lower levels,” down by 1 Bcf or more next year then dropping another 1 Bcf again in 2009.
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