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Providing coverage of Alaska and northern Canada's oil and gas industry
November 2007

Vol. 12, No. 46 Week of November 18, 2007

Gas supplies enter winter in good shape

Gary Park

For Petroleum News

The nosedive in Canadian natural gas drilling that is expected to stretch well into 2008 should not endanger supplies even if North America experiences a cold winter, Canada’s National Energy Board said in its winter outlook.

The regulator also said heating oil inventories are adequate for the winter, but the price of crude will likely remain high through the winter in the range of $75-$80 per barrel.

It said there is a continued risk of rising prices due to tightening inventories, although the price of heating oil should track similarly to the price of crude.

NEB analysts presenting the report said that any shortfall in Canadian gas production would be more than offset by stronger U.S. production and steadily rising imports of liquefied natural gas, which the Energy Information Administration predicts will reach 850 billion cubic feet in 2007, accounting for 4 percent of supplies.

The NEB also said rising output from the U.S. Rockies and gas shales in the Midcontinent will also help cushion any volume declines.

“Energy price volatility is the only certainty,” said NEB Chairman Gaetan Caron.

The board expects natural gas futures prices in North America will hold steady at $6-$8 per million British thermal units on the Nymex market, but an exceptionally cold winter could push prices above that range.

Fewer gas wells drilled

NEB analyst Jennifer Murray told reporters that because fewer gas wells are being drilled in Canada supplies could drop by an average 840 million cubic feet per day in the 2007-08 winter from the recent average of about 16 billion cubic feet per day.

She said that North America is again entering the heating season with above-average storage levels, which “should help keep the market at ease.”

Murray said slipping gas prices saw U.S. drilling slip to 1,760 active rigs in October, but that still easily surpassed the five-year average of 1,288 rigs.

In contrast, she said drilling in the Western Canada Sedimentary basin was down 30 percent year-over-year in the third quarter and 27 percent below 2005, reflecting an estimated C$5 billion shift in capital spending from conventional projects to the oil sands.

“Canadian gas drilling budgets are unlikely to increase in 2008, but a few additional wells could end up being drilled, as under-utilized drillers cut their rates,” Murray said.

Downward pressure on gas price is expected to continue this winter because of ample storage inventories that should take the edge off price spikes, while prices could be further softened by a slowdown in the U.S. economy and the stalled U.S. housing market.

Disconnect between prices

Paul Mortenson, another NEB analyst, said there is a “disconnect” between oil and gas prices, which traditionally moved in lockstep.

He said there is now a “very sloppy gas market,” with additional supplies coming from the U.S. and LNG, creating an oversupply “whereas oil is very much supply-constrained,” as a result of which oil and gas are moving in different directions.

Mortenson said it may be some time yet before the full impact of reduced Canadian gas drilling is felt, although the drop in output of 800 million to 1 billion cubic feet per day “is a big departure from what’s been a fairly flat profile for the last decade.”

However, he said lower Canadian volumes in the larger North American market will be countered by U.S. supply growth in the Rockies, East Texas, Barnett Shale area and the Gulf of Mexico, with a further lift from LNG imports.

Christian Rankin, the NEB’s oil market analyst, said the rising crude prices stem from inventories that are below the five-year average and unstable supplies, with OPEC’s average output down 900,000 barrels per day from 2006, mainly because of a steady draw-down of inventories.

If OPEC raises production at its December meeting that would moderate prices, but that reduction would not show up until spring, he said.






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