CALGARY (Dow Jones)--A steep decline in Canadian natural gas drilling, coupled with increased gas consumption as more oilsands fields come onstream, could dramatically reduce the amount of gas Canada exports to the U.S. in 2007. Analysts believe Canadian natural gas volumes available for export to the U.S. could drop by as much as 1 billion cubic feet a day, or about 11%, tightening available supply and likely ratcheting up futures prices. “We see the supply warning lights for the North American natural gas market as already beginning to flash more brightly,“ said Martin King, an analyst at Calgary-based energy boutique FirstEnergy Corp. “But no one in the broader market really seems to be watching.“
Canada produces around 17.5 billion cubic feet of gas a day, about 50% of which is exported to the U.S, according to the Canada Gas Association. That figure is set to fall in 2007, as companies scale back their gas drilling programs because of lower prices. Since front-month gas futures prices hit a record high of $15.37 per million British thermal units in December 2005, they’ve moderated considerably due to ongoing mild weather and resulting higher inventory levels.
Canadian companies have been particularly hard hit. A strong Canadian dollar in recent years has meant they’ve been realizing lower returns for their production than their U.S. rivals. In addition, the country has a high proportion of shallow gas wells that deplete quickly and aren’t as profitable to drill at times of lower prices.
An oil boom in Western Canada, where the majority of the country’s conventional gas reserves are found, has also ramped up drilling costs in Canada more sharply than in the U.S. As a result, major producers including the country’s top three: EnCana Corp. (ECA), Canadian Natural Resources Ltd. (CNQ) and Talisman Energy (TLM), have slashed their gas exploration budgets for 2007 and invested elsewhere.
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