Oct 29/01,...wealth of info in the charts.
http://170.12.99.3/researchpdf/iEner102901bsow.pdf
Raymond James Energy “Stat of the Week”
Canadian Gas Production Could Be on the Ropes
As U.S. natural gas production has flattened over the past several years, Canadian natural gas supplies
have grown to meet the incremental increases in U.S. demand. Currently, Canada supplies nearly 16%
(10.5 bcf/day) of the natural gas consumed in the U.S., compared with 9% (4.7 bcf/day) just 10 years ago.
While we expect Canada to continue to gain market share in the U.S. over the long term, given untapped
resource potential north of the border, we have recently seen signs that Canadian production could be on the
ropes in the near term. Specifically, the major pipelines exporting gas to the U.S. have begun to show
significant declines in field receipts over the past three months. In fact, we expect that, like the U.S.,
Canadian natural gas production could be peaking for the near term. Further, Canada could have a difficult
time increasing production in 2002 to meet the incremental demand growth of the U.S., lending even more
credence to our 2002 gas price forecast of $3.50.
Field Receipts Point to Peaking Production
In the following graph, we have plotted monthly NOVA and Alliance gas pipeline field receipts versus
Canadian gas well completions. The combined NOVA and Alliance field receipts account for about 85% of
all Canadian gas piped into the U.S., creating a good proxy for overall Canadian gas production.
NOVA & Alliance Field Receipts Vs Gas Wells
Initial observation shows that Canadian gas field receipts are up about 1.0 Bcf/d (8%) this year over last year
in response to strong gas-directed drilling activity, development of a major gas discovery (Lady Fern) and
Alliance’s tie into British Columbia. More importantly, however, gas field receipts have fallen by almost 0.5
bcf/day (4%) in just the last three months, indicating that Canadian production may be peaking. While the
cause for this decline is not clear, a confluence of events, including 1) natural declines and seasonality in
production, 2) field maintenance and planned production curtailments, and 3) increased utilization of pipeline
systems other than the ones covered above, could be contributing to the apparent peak in production.
Determining how much of the decline is related to any one factor is impossible to tell. Nonetheless, given the
recent declines in gas prices and gas-directed drilling activity, we assume that a significant portion of this gas
loss has come from declines at the wellhead.
Accelerating Decline Rates Are Speeding Up Production Treadmill
Much like the U.S., Canadian decline rates have soared over the past decade as producers primarily drilled
for shallow, prolific reservoirs, which deplete fairly rapidly. With most of the low hanging fruit gone, we
estimate that decline rates in Canada are approaching an average of 25%, with first year initial declines in
the high 40% range. What this means is that any hiccup in gas-directed drilling activity should show up
quickly in the gas production numbers. Additionally, production in Canada typically peaks in the spring or
early summer, as wells drilled during the winter drilling season are tied into production. Recent indications,
however, are that many E&P companies are scaling back activity levels, especially those projects targeting
natural gas, for the 2001/2002 winter drilling season. Specifically, Apache Corporation (APA/$52.95/ Strong
Buy) indicated that its winter drilling program would be significantly reduced relative to previous years, and
that the company was focusing more resources on crude oil than in prior years. As a result, we may not
even see the production boost from winter drilling that we have seen the past several years. As such, we
would expect the recent and projected weakness in gas-directed drilling activity to show up over the next
several months, making it difficult for Canada to meet the expected growth in U.S. gas consumption in 2002.
Some Canadian Producers Elected to Defer Production During the Third Quarter
In addition to scaling back activity levels, some Canadian producers elected to defer or curtail production
during the weak pricing environment in September and early October. Rather than sell their gas at
depressed prices, these companies accelerated maintenance schedules and planned outages in the weak
pricing environment with the idea that these deferred volumes could be sold at a higher price in the future.
Furthermore, Alberta Energy Company (AOG/$39.55/Strong Buy) indicated that, in addition to accelerating
planned maintenance, they had actually shut-in approximately 50 MMcf/d of production and continued to
inject significant gas volumes into the company's equity storage in anticipation of higher prices this winter.
While planned curtailments indicate that there may be more productive capacity in Canada than is currently
showing in the field receipts, the resumption of these volumes later this winter will, at best, serve to offset
natural declines, requiring significantly higher activity levels in 2002 to generate the needed production
growth.
Conclusion
The U.S. dependence on Canadian natural gas has grown dramatically over the past decade, as Canada’s
prolific resource base has been tied into the U.S. through numerous pipelines. While Canada remains the
best hope for meeting anticipated growth in U.S. demand for natural gas over the long term, near-term
production looks to be hitting the wall. In conclusion, we have read the recent fall-off in Canadian gas field
receipts as another bullish data point for the gas markets over the next year. Peaking Canadian production,
combined with potentially declining U.S. gas production in the fourth quarter of this year (9/24/01 SOW) and
an anticipated favorable swing in year-to-year gas demand this winter (10/22/01 SOW), leads us to believe
that the gas markets are poised for a strong rebound in 2002. Consequently, we are reiterating our bullish
stance on E&P and Oilservice stocks. |
