Natural gas prices rising
as reserves drop with cold weather, less drilling

Canadian Press - January 5, 2003
by James Stevenson

CALGARY - The cost of natural gas, though not in the global spotlight like the price of crude oil, has been steadily climbing lately due to cold weather and dwindling reserves.

Natural gas futures jumped more than 10 per cent Thursday and a further nine cents Friday to close the week at $5.34 US per million British thermal units on the New York Mercantile Exchange. Forecasters predicted another round of winter storms to pound the northeastern U.S. and boost demand for fuel.

On Friday, the U.S. Energy Department reported that gas storage levels had dropped 123 billion cubic feet in the last full week of 2002, with total storage down 15 per cent from last year.

All this will be a boon to the major natural gas-producing provinces like Alberta, British Columbia and Nova Scotia, which should enjoy greater royalty revenues as prices rise.

But it will also saddle many Canadians with higher electricity and furnace heating bills.

Gord Currie, an energy analyst with Canaccord Capital in Calgary, said the jump in natural gas prices is explained by three major factors - starting with the weather.

"If you didn't have any cold weather on Wall Street - lower Manhattan - by about the middle of December, it's pretty much too late," he said.

"But, of course, they had the one big snow storm and then a second one, so that's good for gas consumption."

In the long term, natural gas prices will depend on a U.S. economic recovery, "and I think the jury is still out on that," said Currie.

If there is a rebound as predicted, that will boost demand for natural gas, which is being used increasingly throughout North America as the fuel of choice for new power plants because it burns cleaner than coal.

The third big issue affecting gas prices is a general decrease in drilling throughout North America, so new deposits are not being found to balance out the decline of existing reserves.

Gwyn Morgan, chief executive of Canada's largest oil and gas company, EnCana Corp., said recently that massive consolidation in the oilpatch and the emergence of royalty trusts has had a harsh impact on exploration.

"If you look at the combined exploration programs of the industry today, given that the trusts aren't exploring and the independents have consolidated, you've seen a huge pullback in grassroots exploration.

"And this is, I think, over time going to take its toll on supply in North America."

Morgan says that two years ago, when natural gas prices last spiked to record levels, companies responded by exploiting rather than exploring. That meant accelerating production instead of finding new sources.

"And the legacy ... was that the decline rates for a lot of our competitors are even higher than they were before."

Another factor in the Canadian natural gas industry is the rapid decline of the prolific Ladyfern field in northeastern British Columbia.

Since the discovery came on line in early 2000, the 40 wells that tap into Ladyfern have been some of the most prolific in North America. Some wells were capable of producing more than 100 million cubic feet of gas a day, compared with just 700,000 cubic feet a day from the average western Canadian well. But with several large North American energy companies involved, including EnCana, Canadian Natural Resources and Kansas-based Murphy Oil, the life of Ladyfern has been severely shortened.

Canadian Natural told analysts in November that Ladyfern was being depleted faster than expected and it would have to reduce natural gas reserve estimates by about 90 billion cubic feet.

Still, with all signs pointing towards higher natural gas prices in 2003, gas-weighted companies should see their cash flows enhanced in early 2003 at least.

"I think we're in for a period of strong gas prices," Stephen Savidant, CEO of mid-sized gas producer Canadian 88, told the Calgary Herald.

But with the volatile nature of the industry, no one is ready to spend extra investment money yet.

"I don't sense any euphoria or anything like that among oil and gas executives," said Savidant. "We've seen these situations come and go before."