CALGARY, Alberta, March 16 (Reuters) - EnCana Corp (ECA.TO), Canada's No. 1 natural gas producer, said on Tuesday it will boost its 2010 capital budget by 20 percent to $4.5 billion as it takes step to double production over the next five years, despite low prices for the fuel.
The company, which spun off its northern Alberta oil sands operations last year into Cenovus Energy Inc (CVE.TO) to concentrate on natural gas, is ramping up spending to develop its massive shale gas holdings in Western Canada and the United States.
EnCana's plans will see it pumping more than 6 billion cubic feet of gas per day by the end of 2015, giving it about 8.6 percent of the current North American market, keeping it as one of North America's largest natural gas producers and squeezing out less efficient companies that have higher costs.
"We should be forcing out the higher-cost producers," Randy Eresman, EnCana's chief executive, told reporters. "And we've already been doing that. In the last couple of years there was a lot of natural gas production being developed in North America that required $8, $9, $10 prices in order to be developed."
EnCana expects prices, with the benchmark futures contract currently at about $4.35 per million British thermal units, to average between $6 and $7 per thousand cubic feet long-term. It said it can produce gas for under $4 per mcf.
It's also expecting demand for the clean-burning fuel to grow as it supplants coal in power generation and producers lobby for more use of natural gas in transportation.
New uses for gas will be critical to EnCana and its peers as output rises from low-cost shale gas reserves. Gas from shale deposits like the Haynesville in Louisiana, the massive Marcellus region centered in Pennsylvania or the Horn River region of British Columbia is pushing up supplies after years of declining production.
Much of EnCana's planned production growth will come from its holdings in the Haynesville and Horn River shales, along with output from the Montney sands of northeastern British Columbia.
Indeed, much of its $750 million capital spending boost will be directed to its Haynesville holdings, where it needs to ramp up drilling in order to ensure it holds onto its leased properties.
However, Eresman said that spending will have to be raised further if it's to meet its goal of doubling production in five years - essentially boosting its growth targets from 10 percent per year to more than 14 percent.
EnCana will need to spend about $6 billion annually, drilling 2,500 wells a year, in order to meet its revamped targets. The company had, in the past, limited its growth in order to avoid causing higher prices for drilling and other services and Eresman said EnCana will try to not spur higher prices as it ramps up activity, counting on what it calls its "gas factory" strategy to keep a lid on costs.
"We'll have to be careful," Eresman said. "But we think the cost are going to go down ... but if we start to see industry inflation creep in we'll back off."
EnCana's manufacturing approach to gas production sees the company drilling large numbers of wells from a single location and repeating that formula over its shale properties.
In its 2010 guidance, EnCana said it expects its production at the end of 2010 to be between 3.4 billion and 3.5 billion cubic feet of natural gas per day. That's up from the 3.1 bcf a day it averaged at the end of January.
The company, which operates exclusively in North America, said it has proved reserves of 12.8 trillion cubic feet of gas on its 12.7 million acres of exploration lands, and could have another 16 tcf recoverable on its holdings.
In its 2010 forecast released on Tuesday, the company said it expects cash flow per share of between $5.85 and $6.40 this year.
EnCana shares were down 30 Canadian cents, or 0.9 percent, at C$33.65 at midafternoon on Tuesday on the Toronto Stock Exchange.
($1=$1.01 Canadian) (Editing by Rob Wilson)