High demand in the northwestern and northeastern United States generated rising Canadian natural gas deliveries, but it was not strong enough to prevent a sharp drop in average prices and total revenues during the first half of the export contract year.

Canadian pipeline export volumes rose 3.6% during the six months ended April 30 to 1.84 Tcf from 1.78 Tcf in the same period a year earlier, show trade records kept by the National Energy Board. Average prices paid at the international boundary dropped 19.3% to US$7.15/MMBtu in the first half of the 2006-07 export contract year from $8.87 in November through April 2005-06. Canadian gas export revenues for the period dropped to US$13.26 billion, down 16.9% from $15.95 billion in the first half of 2005-06.

Canadian pipeline shipments to the northeastern U.S. rose 11.8% during the first half of the current contract year to 670.1 Bcf from 599.3 Bcf during the same period of 2005-06. Northeast prices fell to US$7.51/MMBtu in the six months ending April 30, down 17.9% from $9.15 during the first half of the 2005-06 contract year. Exports to the Pacific Northwest rose 26.1% to 234.8 Bcf in the first six months of the current contract year from 186.2 Bcf in the same period of 2005-06.

The average price fetched at the border by Canadian gas bound for the U.S. Pacific Northwest fell to US$6.60/MMBtu in the six months ended April 30, down 22.6% from $8.53 a year earlier.

Canadian gas shipments to California fell to 216.6 Bcf in the first half of the current export contract year, down 3.9% from 225.5 Bcf in the same period of 2005-06. California export prices dropped 19.3% to US$6.85/MMBtu in the six months ended April 30 from the $8.49 average for the same period of 2005-06.

In the largest destination for Canadian gas exports, the U.S. Midwest, six-month volumes dropped 5.6% to 720.1 Bcf from 762.9 Bcf. The average price for Canadian deliveries to the Midwest dropped to US$7.09/MMBtu during the first half of the 2006-07 contract year, down 19.9% from $8.85 in 2005-06.

The price erosion left Canadian producers well below the level estimated by analysts such as FirstEnergy Capital Corp. to be necessary to revive drilling to the flat-out pace of 2005 and 2006.

It will take a sustained price recovery to C$7.90-$9.20 (US$7.50-$8.75) to rekindle Western Canadian drilling, FirstEnergy calculated after reviewing current well costs and results among Canadian producers. Prices will have to stay in the higher band for at least a year to convince the industry to revive to full speed, the analysts predicted.

After falling to the lowest levels seen in about a decade since March, Western Canadian drilling has begun to recover but remains well below 2005 and 2006 peaks and industry associations predict wells drilled will be off by 25% or more this year.

As of last week, 352 of 887 drilling rigs available in Western Canada were at work, according to records of the Canadian Association of Oilwell Drilling Contractors.

The current activity level is about four times as high as the deep low hit in the spring, when poor prices compounded an annual seasonal drop off that was especially sharp this year due to an exceptionally wet thaw that drove heavy equipment off soft roads and fields.

But the recovery is only partial. At this time last year, 577 drilling rigs were operating in Western Canada. Most of the 40% drop in field activity is concentrated in shallow drilling for small reserves targets and in Alberta’s fledgling coalbed methane operations.

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