Total Canadian natural gas production, estimated to be down about 0.5% in 2002 — as much as 2.5% in Ladyfern alone — will fall another 2-4% this year, according to a new Lehman Brothers Forecast issued Tuesday.

Noting that it has become “increasingly difficult” to offset the declines in production in western Canada, analysts Thomas R. Driscoll and Philip R. Skolnick believe it will be “challenging for companies to create shareholder value” into the future without more exploration.

The analysts pointed to initial well productivity that is down about 45% from 1995 levels as a key indicator. Also, average reserves per well are less than 25% of the 1995 average. “We believe this is because the industry has been focusing on shallow natural gas plays where reserve finds are getting smaller.” Canada’s National Energy Board (NEB) estimates that 67% of gas well connections in 2001 were shallow gas plays in western Canada.

With lower production rates and smaller reserves per well, signs point to “deteriorating economics and higher F&D (finding and development) costs in western Canada,” said the Lehman analysts. “As long as the industry continues to focus on mature, shallow natural gas plays, we believe F&D costs will continue to rise as reserve finds are getting smaller.”

Unless there is a “shift into less mature areas,” the analysts warned, “companies will destroy shareholder value.” Estimated total Canadian gas production year-to-date November 2002, excluding a portion of ATCO volumes and all of Trans Gas volumes, was down 0.9% from 2001. In 2001, there was a 4.7% production increase.

One distressing signal is in the Ladyfern area, once considered to be one of the most prolific in the country. The NEB estimates its decline to be 63% from year-end 2002 to year-end 2004. However, the Lehman analysts were less optimistic: “based on information provided by operators…the decline from Ladyfern is expected to be greater.”

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