Softer natural gas prices are eroding Canadian well numbers, but western drilling rigs are staying busy as the industry switches to targets requiring more work including deep supplies to bank for future use.

A new forecast by the Petroleum Services Association of Canada predicted a 7.5% drop in total western wells to 23,410 this year from 25,290 in 2005. The projections mark the first decrease since the last time gas prices retreated during 2002. But 596 drilling rigs were still working this week in western Canada, up slightly from 594 a year ago. About four-fifths of the activity is also still in Alberta, source of about 80% of Canadian gas supplies. The dip in well numbers is concentrated in fast, shallow gas drilling including coalbed methane programs that respond rapidly to energy market fluctuations, PSAC said.

Activity in plains regions of shallow and coal-seam gas drilling fell 57% to 1,076 wells in the second quarter of this year. PSAC is widely regarded as a reliable barometer of Canadian industry activity, representing more than 260 companies with in excess of 58,000 employees that experience industry trends up close and personal as field service and supply contractors. The trade association also lowered its 2006 annual average gas price forecast by about 25% to C$6.25/Mcf (US$5.62) from expectations of C$8.60 (US$7.74) last fall.

“We expect continued downward pressure on current gas prices until mid-to late November,” PSAC president Roger Soucy said, echoing a Canadian industry consensus that full storage and past supply increases will continue to compensate for periodic demand jumps during summer heat waves.

Canadian gas prices hit 20-month lows early this summer after a warm winter, a pleasant spring, and production increases from previous record drilling reduced demand and topped up supplies. The industry, while paring back shallow gas drilling, is switching to different, deeper and larger targets, FirstEnergy Capital Corp. reported in a recent investment research note.

Conventional oil drilling licenses issued by provincial authorities were up nearly 40% in June, thanks to record high crude prices. But gas still accounts for more than two-thirds of Canadian drilling. Licenses granted for deep gas wells climbed to a five-year high in May and June.

“It appears producers are taking advantage of additional rig availability to drill some long-term targets,” FirstEnergy said.

The drop in shallow gas drilling is expected to help stabilize industry costs inflated by rapidly rising demand for equipment and personnel over the past three years of high oil and gas prices. While the number of rigs at work has not changed, the fleet has grown by adding new units.

A record 802 rigs are currently available in western Canada, up 8% from 743 units a year ago. The rig use rate is currently 74%. The figure is very high by historical standards of the Canadian industry, which packs most of its activity into cold weather months when the muskeg swamps where it does much of its work freeze hard enough to support heavy equipment. A year ago, the smaller drilling fleet was 80% booked up.

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