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        In the public interest, I wish you would kind enough to publish this story. We will have gas shortages sooner than people think. How are we goinbg to heat all those houses without natural gas? You need to start feeling the pain of it.
 
                                                                                     Kermit Schlansker
 
 
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Friday May 31, 4:09 pm Eastern Time

Reuters Company News
Canada faces struggle pumping more natgas to U.S.

By Jeffrey Jones

CALGARY, Alberta, May 31 (Reuters) - Canadian natural gas production may have reached a plateau just as the country's role as supplier to the United States is becoming more crucial due to declining U.S. gas output and rising demand, analysts said on Friday.

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Without a major new western Canadian gas find, production could be flat, or even down, for the next few years until new offshore projects start up off the Nova Scotia coast, some analysts said. The situation has helped fuel predictions of sharply higher North American prices.

"I think that's definitely going to be the case here, because the drilling's coming back in Canada but it's not coming back to the same strong levels that we saw last year," said Martin King, analyst with FirstEnergy Capital Corp.

Canada now supplies as much as 18 percent of the gas used in the United States, where domestic output is predicted to slide anywhere between 2 and 5 percent because of a sharp drop in U.S. drilling last year as prices fell.

U.S. consumption, meanwhile, is expected to rise by as much as 3 percent, with the biggest gain coming from a hefty 60,000 megawatts of new gas-fired power generation.

As in the United States, Canadian drilling tailed off late last year, and producers were already battling declining production from existing wells.

The last major Canadian discovery was at Ladyfern in northeastern British Columbia, which accounted for just about all of the increase in Canadian output over the past two years despite record drilling nationally in 2001.

Several analysts said output from Ladyfern, site of drilling by such companies as Canadian Natural Resources Ltd. (Toronto:CNQ.TO - News), EnCana Corp. (Toronto:ECA.TO - News) and Murphy Oil Corp. (NYSE:MUR - News), has likely peaked at just under 700 million cubic feet a day and is set to start sliding.

"The only reason Canadian production is up this year over last year is because of Ladyfern. I would argue that it would be down slightly without Ladyfern," said analyst Peter Linder of Research Capital Corp.

Linder, a noted bull on prices, predicted Canadian gas would average C$5 per gigajoule ($3.50 per million British thermal units) this year. That would require strong second-half recovery because it averaged C$3.37 in the first quarter, and is currently in that range again.

'MARKET'S TIGHTER THAN WE THOUGHT'

Today's lower prices will likely be short-lived, King said.

"Things can start firming up later in the summer when the U.S. heat starts picking up. Then we think it's going to be the case that people are really going to sit up and take notice of these production declines, and say 'the market's a lot tighter than we thought it was,'" he said.

Canada pumps out just over 17 billion cubic feet of gas a day, most of it from the western Canadian provinces of Alberta and British Columbia, but with increasing volumes from the southern Northwest Territories and the East Coast, notably the 550 million cubic feet a day Sable project off the Nova Scotia coast.

A second Nova Scotia offshore development, EnCana's Deep Panuke project, is slated to produce 400 million cubic feet a day, although not until 2005. Gas from the Arctic region is not expected to reach southern markets until later in the decade.

One market expert said Canada's producers would buck the trend and boost output this year and next as higher prices spark more spending on drilling. Analyst Roland George of consultants Purvin & Gertz predicted Canadian gas would average C$4 a gigajoule this year and slightly more in 2003.

"The producers will be putting in incremental production capacity, so, yes, they'll be beating the natural gas decline rates," George said.

This winter, Canadian exports to the United States averaged 10.8 billion cubic feet a day during January and February, down about 6 percent from the same period a year earlier, according to National Energy Board figures.

Analysts attributed the drop to the weak U.S. economy, warm weather in northern states and a cutback in Canadian output as prices stayed low. Gas prices did stage a recovery in March.

($1=$1.53 Canadian)

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