A normal winter in Canada is predicted to lead to reduced natural gas exports, a move that could have increased US production fulfilling additional demand south of the border.

A squeeze on natural gas inventories by next year could boost prices and US production in the second half of 2013 thanks to the success of US shale plays and declining Canadian exports, according to a recent report by Global Hunter Securities LLC (GHS).

The analysis by GHS, an investment bank focusing on energy, metals, and mining, and shipping, paints a rosier picture for demand than the recent US Energy Information Administration’s (EIA) short-term energy and winter fuels forecast. The agency anticipates a less significant dip in net exports.

The majority of US pipeline imports deliver gas from Canada and “examining this from the Canadian supply side makes us believe a bigger decline (in exports) is in order,” said Brian Purdy, lead analyst of the report.

Last year, net Canadian exports fell as cooler weather increased domestic gas consumption. A more normal winter would likely bring additional demand, which US producers should be able to replace.

Other signs point to weak gas activity in Canada. The number of gas-targeted licenses dropped below an average of 100 per month this year, compared with 210 monthly last year. About 90% of licenses are in the hunt for oil rather than gas, Purdy said.

Canadian gas production has been on the wane since 2006 as the US’ more-efficient, low-cost shale gas plays have priced others out of the market. While high storage levels in both countries have depressed prices, winter temperatures could amp up demand.

A more “normal” winter, resulting in extra demand of 1 Bcf/d to 1.5 Bcf/d, could reduce exports to the US by “a material amount,” he added.

The EIA has lower expectations, predicting net imports into the US, excluding LNG, to decline by approximately 0.2 Bcf/d in 2012.

Working inventories at the end of September were about 3.7 Tcf, about 8% above the same time last year, the EIA said. The agency expects the Henry Hub natural gas spot price, which averaged $4.00/MMbtu in 2011, to average $2.71/MMbtu this year and $3.35/MMbtu in 2013.

Two federal weather forecasts, which cover December through April, suggest that temperatures could be above normal in the northern US and especially in the northeast, as well as Alaska. Along the Gulf Coast states, temperatures could be below average, according to the National Weather Service Climate Prediction Center. Many of the western states could see any variation: normal temperatures, hotter or colder.

The US winter 2012-13 heating season forecast is about 2% warmer than the 30-year average, but 18% colder than last winter, the EIA said.

The mean temperature for June-August was 74.41°F, the third-warmest summer on record.

Nevertheless, net Canadian exports are down at least 0.5 Bcf/d year to date (YTD), and Purdy suggests Canadian exports could be scaled back even more if demand at home increases.

Purdy notes the YTD average shows a continued drop in Canadian natural gas production to near 13.5 Bcf/d in July. In February, it was around 15 Bcf/d.

“A reduction of 1.0 Bcf/d to the US and a reduction of 150 Bcf from Canadian storage is very possible, in our view,” Purdy said.

Currently, natural gas storage in Canada is above the five-year maximum, according to the Canadian Gas Association.
Combined with a dwindling appetite for gas licenses and tepid investor interest, “we do not expect a robust winter drilling season in dry gas plays,” he continued.

Higher gas prices would benefit US producers most, though Canada would also benefit. “Clearly new gas development is occurring in the US at the expense of Canada; however, we suspect the declining gas exports to the US will help both prices and differentials,” he explained.

The only dry gas play in Canada that Purdy says is competitive with the US is the Montney shale in British Columbia. He expects that New York Mercantile Exchange (NYMEX) gas prices above $4.50 per thousand cubic feet could prompt more activity there.

Higher gas prices also would benefit liquids-rich natural gas plays that are mostly in early stages, “but are holding their own based on the liquids content,” he said.

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.