The Globe and Mail

Continent's largest producer reduces output and trims costs as low prices make production uneconomic

NATHAN VANDERKLIPPE

CALGARY -- The continent's largest natural gas producer is turning off the taps on a hefty chunk of its daily natural gas production, saying low prices make it too expensive for EnCana Corp. ECA-T to bring some of its gas to the surface.

With gas prices hovering around $4 (U.S.) for 1,000 cubic feet, EnCana has dropped its production by "a couple hundred million cubic feet per day in Canada, and a couple hundred million cubic feet in the U.S.," chief executive officer Randy Eresman said yesterday, adding that the company is also cutting spending by 10 per cent.

EnCana had planned to produce 3.8 billion cubic feet a day this year.

Gas prices have remained weak in the face of leaping crude prices, largely because of a glut of cheap new gas supply coming from unconventional gas sources that are being tapped using new technology.

"At these prices ... on a full-cycle basis, they're below what's economic for any producer," Mr. Eresman said. "We are shutting in some of our gas and have shut in some across our portfolio."

The production cuts come as EnCana also looks to trim about 10 per cent from its $9-billion capital and operating budget, partly through savings from the declining cost of doing business.

The company could have been forced into a deeper round of budget slashing in the next few months had it not been able to secure price hedges for about 35 per cent of its 2010 natural gas production, which will guarantee an average price of $6.21 (U.S.) for 1,000 cubic feet for 1.39 billion cubic feet a day.

"The current hedge position that we're putting in place gives me comfort that we can go ahead with our capital program as it is. Had we not had that in place, I'd be starting to think about cutting down activity as early as this fall," Mr. Eresman said.

The industry has already cut several billion cubic feet from daily natural gas production in North America, which consumes on average about 76 billion cubic feet a day. Another major cut came in April, when Chesapeake Energy Corp. dropped its daily gas production by 400 million cubic feet.

The cutbacks limit the possibility of a collapse in gas prices, which could have been triggered had production continued strong in the face of offshore liquefied natural gas imports, said BMO Nesbitt Burns analyst Randy Ollenberger.

"Everything at the margin helps right now. What we've got is a situation where we've got 1.5 billion cubic feet a day of LNG coming into the market, and the question is whether that's going to grow," he said. "And if domestic producers shut in enough gas production to allow that LNG to come in without disrupting the market, that could prevent a price collapse."

Still, more cutbacks are needed, Mr. Ollenberger said.

"If domestic production doesn't come off more aggressively ... I think you could see LNG delivery into the U.S. for below the $2.50 level," he said.

EnCana said it has trimmed gas production from across its portfolio, but especially from its holdings in the U.S. Rocky Mountains, where a shortage of pipeline capacity has led to oversupply.

The company has not set any specific price targets to reinvigorate that production, Mr. Eresman said.

EnCana will wait until "they're economic. Just so they make money again," he said.

EnCana (ECA)

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