A turning point has been passed on the “continental” North American market for natural gas, with Canadian supplies consistently marking a retreat while imports from overseas rapidly advance to fill the gap.

The trend showed in the latest quarterly report on the international gas trade, covering the height of the last winter heating season, by the Office of Fossil Energy in the U.S. Department of Energy. In the first three months of this year, Canadian pipeline exports to the U.S. of 899.4 Bcf were down by 56 Bcf or 7.4% compared to 957 Bcf in the opening three months of 2002.

At the same time, liquefied natural gas deliveries to the U.S. by ocean-going tankers hit 75 Bcf – up by 49 Bcf or 190% from 26 Bcf in first quarter 2002. The tanker shipments arrived at ports in Massachusetts and Louisiana from Algeria, Qatar and Trinidad.

U.S. imports of LNG only have to stay at their first quarter pace for the rest of the year, with no further growth, to hit a record 300 Bcf in 2003 – up 20% from the previous annual peak of 252 Bcf set at the height of the “energy-crisis” period in 1979.

The U.S. calendar-year scorecard on the continental market differs only in detail from trends documented by the National Energy Board, which tracks the traditional gas contract year that runs Nov. 1 through Oct. 31. The NEB record shows Canadian pipeline deliveries to the United States have fallen for six consecutive months this year compared to the same months of 2002.

The latest NEB survey, for June, recorded an 11.9% drop in exports to 290.2 Bcf from 255.6 Bcf in the same month of 2002. The agencies’ records highlight expectations of limited supplies and strong gas demand that drive a line-up of projects to increase North American capacity for topping up the continent’s gas supplies by importing more LNG from overseas.

The list includes three Canadian contenders to build terminals on the Atlantic seaboard: Access Northeast Energy Inc., Irving Oil Co. and TransCanada PipeLines Ltd. Whether Canadian supplies have permanently turned the corner into an irreversible long-range natural decline — and if so, at what rate — remains a hot topic of controversy north of the border.

FirstEnergy Capital Corp., which makes a specialty of tracking productive capacity as a leading indicator of prices, maintains decline has set in and the slippage will average 2.5% or about 500 MMcf/d for 2003. A rival investment house, Peters & Co., predicts “supply-demand fundamentals will begin to exert some downward price pressure through 2004 and into 2005.”

Besides deteriorating demand due to market spikes, Peters foresees more robust responses on the supply side than the price bulls expect. The Peters analysts forecast slippage in Canadian productive capacity of 400 MMcf/d this year, but project no numbers for 2004. They point to a developing trend for Canadian drilling to break its recent pattern of concentrating on low-cost shallow wells for small reserves and expand into deeper hunts for large reserves along the foothills of the Rocky Mountains in Alberta and northern British Columbia.

Canadian producers put money where Peters’ mouth was by spending C$418 million (US$320 million) for new drilling properties at a single B.C. sale in September. The total matched the province’s previous record for an entire fiscal year, set in 2000-01.

Anxiety over supply has yet to affect international gas trading practices. There is no sign of action on warnings heard since last winter from numerous officials including NEB Chairman Ken Vollman, urging gas consumers to put a priority on supply security by reviving long term contracts. Between 1985 and 2002, the volume of Canadian gas exported to the U.S. under short supply contracts lasting less than two years jumped from 0.3% to 80%, the fossil energy office’s records show.

The trend continued in first quarter 2003, with short contracts accounting for about 83% of the trade. The use of short-term sales agreements and government gas trade licenses approaches 100% on the two newest international delivery routes, Alliance Pipeline between northern B.C. and Chicago and the Maritimes & Northeast Pipeline from Nova Scotia’s Sable Offshore Energy Project and Boston.

The Washington agency also underlined the importance of the international trade in natural gas to suppliers and buyers alike on both sides of the Canada-U.S. border. Between 1986 and 2002, the annual volume of Canadian deliveries to the U.S. grew by about 413% from 926 Bcf a year to 3.8 Tcf. As of last year, American energy consumers relied on Canada for 17% of their natural gas supplies, compared to 4.6% in 1986.

Canadian gas producers relied on U.S. buyers for 56% of their total sales last year compared to 29% in 1986. By the Washington agency’s count, Canadian gas export revenues were US$11.8 billion in 2002. That was down by 28% from US$16.4 billion in 2001 and 14% from US$13.8 billion in 2000 due to a trough in the price cycle across the continent.

But 2002 was still the third-best year in for Canadian gas-export revenues, with the total 6.5 times higher than the US$1.8 billion fetched by U.S. deliveries in 1986. Prices at the international border continue to rebounding this year. In June, despite the shrinking delivery volumes, the NEB recorded a 59% jump in Canadian gas export revenues to US$1.4 billion compared to US$885 billion for the same month of 2002, thanks to an 80% increase in the average price at the border to US$5.47 per MMBtu from US$3.03.

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