News

A steep increase in pipeline tolls could result in curtailed natural gas production and delayed drilling plans, says one of Canada's biggest gas producers.

Higher transportation costs will further pressure already weak natural gas revenues for producers and will "push some wells in this low-price environment to be shut in," Steve Laut, president and chief operating officer of Canadian Natural Resources Ltd. said yesterday. "This would be both for CNRL [Canadian Natural] and the industry as a whole."

Canadian Natural and others in Alberta's gas industry are grappling with low prices, the economic downturn and an unfavourable new royalty regime. Some have already shut-in production and brought drilling levels to extraordinary lows.

Adding to the industry's problems, TransCanada Corp. said Wednesday that the tariff on its Canada mainline pipe could increase by nearly 50 per cent next year. The reason is that it must bump rates to maintain a steady rate of return in the face of a crash in natural gas production that has left its 14,100-kilometre line with lower volumes.

TransCanada is currently negotiating with the industry to lessen the impact of the rate hike, which could suck away as much as 10 per cent of gas companies' top-line revenue. TransCanada has also said it expects the toll pain to ease in 2011 and 2012, when a surge in production from northeastern B.C. gas fields fills its pipe.

Until that happens, though, "you get into a death spiral here if you're not careful," Mr. Laut said in an interview.

The proposed toll increase is "quite a lot, and obviously it would slow down activity," he said. "And it becomes a self-fulfilling prophesy."

In other words, a higher toll leads to less gas production, which leads to an even higher toll, and so on.

Canadian Natural said yesterday it has shut in 12 million cubic feet of daily production for economic reasons, and does not expect to reopen those taps until natural gas tops $6 - a prospect that is "not likely" in the next six months, Mr. Laut said.

While the shut-in volumes are only a fraction of its 1.3 billion cubic feet of total daily production, Canadian Natural's overall gas output is down 13 per cent from this time last year, as it diverts money toward oil production.

The company produces roughly 10 per cent of Canada's total gas, but "we're going to be very cautious on how we proceed going forward," Mr. Laut said. "Our concern here is there's a lot of supply right now, and even more supply that can be brought on very quickly. ... I suspect the gas market will be pretty bumpy for the next little while."

Canadian Natural reported third-quarter profit of $658-million, down from $2.8-billion in the same quarter last year. Its quarterly revenue of $2.82-billion was just over half its level from a year ago.

The company's $9.7-billion Horizon oil sands mine missed its forecast production by about 20,000 barrels a day, owing to production problems, the company said. And although Canadian Natural said it has largely resolved those issues, other startup problems could still develop.

"It's a big, complex plant and you want to make sure you get it very carefully brought up to speed," Mr. Laut said. "So there could be a few bumps in the road yet."

Cdn. Natural (CNQ)

Close: $67.71, down 89¢

Report on Business Company Snapshot is available for:

CANADIAN NATURAL RESOURCES LIMITED