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Gas producers drop price forecasts in face of ‘excess supply’ Tenth annual survey by Canadian Energy Research Institute Gary Park PNA Canadian Correspondent
Tired of grappling with volatile supply-and-demand swings and worried about surplus supplies, Canada’s natural gas producers may start basing their exploration and development plans on sharply reduced price expectations, says a study by the Canadian Energy Research Institute.
CERI’s 10th annual survey of forecasts for gas prices, capital spending, drilling and production found that producers are no longer as willing to base their decisions on even conservative price forecasts.
The study said the reaction by producers to mild temperatures and a weakened economy last year was “so strong that perceptions of a supply-constrained market now have been replaced by impressions of excess supply.”
As a result, the producers have predicted average gas prices of C$5.72 (US$3.60) per thousand cubic feet in 2001, C$4.42 in 2002 and C$4.05 in 2003.
With cash flows tightening and gas prices again being battered by high storage levels and sagging U.S. demand, producers are continuing to chop drilling activity, said Peter Linder, an analyst with Research Capital Corp. in Calgary. Land sales drop The strongest evidence of tightened purse strings was a 61 percent drop in fourth quarter land sales in Western Canada from a year earlier, with average bids tumbling to C$50 per acre from C$165 in the second quarter of 2001.
In addition, the latest profit report for Canadian oil and gas producers, covering the third quarter of 2001, showed capital spending totaled C$8.5 billion for the three months, 49 percent more than cash flows of C$5.71 billion, after sky-high commodity prices in the first six months pushed cash flow well above reinvestment.
For the first nine months of last year, the largest profit increases were posted by PanCanadian Energy Corp., up C$517 million; Husky Energy Inc., up C$420 million; Anderson Exploration Ltd. (since taken over by Devon Energy Corp.), up C$342 million and Petro-Canada, up C$326 million. The greatest third-quarter profit gains were by Anderson C$58 million, Suncor Energy Inc. C$23 million, Husky C$18 million and Canadian Hunter Exploration Ltd. (since taken over by Burlington Resources Inc.) C$12.8 million.
“A recovery in demand growth and continued strains on the industry to increase supplies will eventually tighten supply-demand margins again and makes prices in the C$4 (per thousand cubic feet) range achievable over the long term,” said the CERI study.
CERI predicted capital spending on gas at C$16.97 billion in 2001, C$18.17 billion in 2002 and C$19.5 billion in 2003, while production is expected to average 18.7 billion cubic feet per day in 2001, 18.9 billion in 2002 and 19.4 billion in 2003. Gas completions up Gas well completions have grown by more than 2,000 a year since 1998 and producers expected to reach 10,183 in 2001, including substantial increases in the shallow fields of southeast Alberta and Saskatchewan as well as northeastern British Columbia.
But CERI said there were signs that exploration is gradually shifting to deeper plays in the Western Canada Sedimentary Basin.
The diversion of capital to the Arctic and East Coast offshore could become an issue for future development in Western Canada, the survey said.
“While the next major developments on the frontiers are beyond the time horizon of the survey, their influence may be felt in a declining share of capital for Western Canada, beginning in 2003,” the study authors said.
But additional gas deliverability from the frontiers was not likely to show up until 2005-07, putting pressure on Western Canada to maintain adequate production growth in 2004 and beyond, they said.
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