Canadian Natural Gas Prices Look Good Long Term

CALGARY — After a winter of five-year lows for oil and gas drilling rates in Western Canada, there are signs of recovery in the natural gas sector as higher prices spur more activity.

Last week, producers hired 593 drilling rigs, almost as many as the 603 in service at the same time last year, according to weekly rates recorded by the Canadian Association of Oil Drilling Contractors. That's a major advance from earlier this winter, when about 20 per cent fewer wells were being drilled.

A resurgence in natural gas prices, which hit 15-month highs on Tuesday and are trading at more than $9 (U.S.) a million British thermal units at the New York Mercantile Exchange, is driving the increased activity.

The oil sands of Alberta – Canada's main energy-producing region – have boomed, thanks to high prices for crude oil, which Wednesday hit an all-time high of $101.32. But most of the province's production still comes from shallow natural gas wells that don't produce for long, and are more sensitive to price fluctuations.

Western Canada's gas generally sells for over a dollar less than U.S. futures prices, so producers are currently getting less than $8 per million BTUs for their output. That price is enough to make some deep, productive wells profitable.

But higher costs in Canada – because of Alberta's oil boom – mean prices of between $9 and $10 per million BTUs would be required to make most wells economically viable and cause drilling to bounce back fully, according to Roger Soucy, president of the Petroleum Services Association of Canada (PSAC).

“The gas price for Canada, and particularly Alberta, is going to have to be north of where it is now, and on some level of permanence, before people start getting excited,” Mr. Soucy said.

PSAC forecasts don't point to sharp increases; it expects only 14,500 wells to be drilled in Western Canada in 2008, down from 18,500 in 2007 and 23,000 in 2006.

Only once, have prices been sustained above that level for any amount of time – when hurricane Katrina hit in the fall of 2005, and the impact lasted until the following summer. Low prices have pushed major producers such as EnCana Corp., Canadian Natural Resources Ltd., Talisman Energy and Husky Energy Inc. to slash millions of dollars of spending on conventional gas exploration since 2006.

Over the longer term, gas prices could benefit from stronger demand. According to ARC Financial Corp., demand in the United States for natural gas is increasing, due to the construction of more power generation plants that consume natural gas, which is seen as being more environmentally friendly than oil or coal.

“This is bullish news for gas consumption,” ARC chief economist Peter Tertzakian said in a research note. “Natural gas is taking market share away from coal and nuclear power, with environmental issues and policies being the main drivers … It's yet another factor that supports sustainably higher prices for natural gas going into the next era.”