Gas industry profits plummet

Canada’s natural gas producers will reap their lowest profits in a decade this year, the Conference Board of Canada predicted Friday, as prices for the commodity remain stubbornly below what’s needed to entice companies to drill.

CALGARY — Canada’s natural gas producers will reap their lowest profits in a decade this year, the Conference Board of Canada predicted Friday, as prices for the commodity remain stubbornly below what’s needed to entice companies to drill.

The Ottawa-based economics think-tank said the gas industry’s overall profits will total just $2.3 billion this year, down 60 per cent from last year and the lowest since 1999.

It also says output by Canadian gas producers will be down five per cent in 2009 from last year’s level, which was 5.2 per cent below 2007 output.

“So much has changed for the natural gas industry in just one year,” said Todd Crawford, an economist with the board. “Last year, revenues more than doubled over the first six months as gas prices skyrocketed. Now, low prices and the tough credit conditions have created a perfect storm that sent drilling activity in Canada tumbling this year.”

Natural gas prices have tumbled from a high of US$13 per 1,000 cubic feet in July 2008 to below US$2 per 1,000 cubic feet earlier this month, prompting many energy companies to rein in their drilling.

Natural gas for October delivery added 32 cents Friday to settle at US$3.778 per 1,000 cubic feet on the New York Mercantile Exchange.

Canada’s junior oil and gas sector has been hit particularly hard, since the lion’s share of its activities are focused around natural gas, as opposed to more lucrative oil developments.

“I think natural gas producers are certainly hoping we’re bumping along the bottom right now in terms of the price cycle,” said Gary Leach, executive director of the Small Explorers and Producers Association of Canada.

“The big question is at what pace will natural gas prices recover.”

In its report, the Conference Board said it expects gas-sector profits will begin to grow again in 2010.

Some companies have the flexibility to direct more of their spending toward oil developments, which are much more attractive given crude’s relatively robust pricing.

“Companies that don’t have that good fortune … they’re the ones facing the biggest challenge in managing through this low gas environment,” Leach said.

“And all of them have undoubtedly substantially their spending to live within their cash flow and try to maintain their performance.”

Companies that provide drilling and other services to natural gas producers have also been having a rough time lately, said Don Herring, president of the Canadian Association of Oilwell Drilling Contractors.

The group expects around 8,000 wells to be drilled in Canada this year compared with 22,000 wells drilled in each of 2005 and 2006, when natural gas prices were much stronger.

Only about a fifth of the drilling rigs in Canada are currently working, Herring said.

“So 80 per cent of our equipment is parked,” he said.

“Without prices high enough to attract investment, we just don’t go to work in any significant numbers.”

“They’re really sitting there trying to survive and wait until the market comes back, taking the best advantage they can of fairly strong balance sheets if they’ve got them,” Herring said.

“So really they’re just in a holding pattern.”

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