Canadian producers are cutting back on gas-well plans, redeploying their efforts toward oil and hoping for stronger gas prices in 2007, according to FirstEnergy Capital Corp. analysts Kevin Lo and Steven Paget. Though June was a record month for well licenses in Canada, the 20% drop in Alberta AECO gas prices (versus June 2005) has prompted a shift toward oil, they say. In June, 634 conventional oil wells were licensed, compared with 462 during the same period last year. Not all of the gas drilling programs in Canada have been affected equally. Licenses in coalbed-methane (CBM) fields dropped 46% in 2006 versus 2005, they report. Also, shallow-gas licenses were down 35% in the second-quarter compared with second-quarter 2005, despite the fact that the weather was worse last year. "With only 1,257 wells licensed in the second quarter, this was the lowest amount of shallow-gas licenses issued in any second quarter of the past five years. Like CBM, shallow gas is an 'economic' play with its success determined largely by logistics. Producers know where the gas is, and their ability to extract the gas economically is a question of costs versus gas prices," the analysts report. Licenses for medium-depth gas targets slipped 12% quarter-over-quarter, while deep-gas licenses fell 1.4%. "...But producers licensed more deep gas wells in May and June 2006 than in any of the past five years. It appears that producers are taking advantage of additional rig availability to drill some long-term targets." As for oil, licenses in light/medium-grade oil fields were up 17% in second-quarter 2006 versus the same period last year, and they're now at five-year highs along with oil prices, which are up 18% in Canadian dollars for light crude at Edmonton, the analysts report. Heavy oil/bitumen licenses are lower this year to date versus 2005, but were up 10% in second-quarter 2006 versus 2005. The 2006 figures by year-end will show overall reduced gas-drilling activity, with shallow-gas and CBM taking the hardest hit, they predict. Shallow-well producers are also encountering a reduced number of targets and increased competition from new entrants, they say. "Additionally, the fracturing cost for a well has increased to the point where, in some cases, they exceed the cost of a drilling rig, which provides a target for E&P companies to target price concessions...." Stronger gas prices in 2007 could quickly turn economics around for the shallow-gas players, they add. "We continue to expect the stock market to trade sideways during the summer, as the market attempts to look for direction in the natural gas pricing. However, we believe investors focused on valuations and Buy-quality names at depressed levels will ultimately profit in the long-run."

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