David Ebner

Vancouver — Last updated on Friday, Aug. 21, 2009 09:35AM EDT

Natural gas has crumpled to its lowest price in seven years, cutting a swath across the industry in North America as it reels from a flood of new supply and weak demand because of the recession.

The price of gas on the New York Mercantile Exchange tumbled below $3 (U.S.) yesterday for the first time since August, 2002, and closed down 5.6 per cent at $2.95 per million British thermal units. The decline was sparked by the latest inventory report, which showed another large injection of the commodity into underground storage caverns in the United States, which are expected to fill up ahead of the winter heating season, when much of the fuel is consumed.

In Calgary, after more than a year of falling prices, gas producers have been girding themselves for this – partly by slashing spending on new wells and, increasingly, by turning off the tap on existing ones to wait for better prices.

The number of rigs drilling for gas in the United States is down by more than 50 per cent. In Canada, the decline is close to two-thirds.

“We have no rigs running whatsoever,” said Brian McLachlan, chief executive officer of junior explorer Yoho Resources Inc.

As the industry struggles through a lean time, Mr. McLachlan says he is getting ready for tomorrow instead of worrying about today. He has increased Yoho's budget to buy new exploration rights on land by a third, to about $3-million, shifting the cash away from drilling and seismic studies. Land is particularly cheap in Western Canada right now, the result of low commodity prices, the recession and the credit crunch.

Companies that are still drilling are connecting new wells to pipelines but not turning on production until prices are higher. Others, like industry leader EnCana Corp., are capping existing wells until prices rebound.

But analysts say more supply will have to be pulled out of the market before there is a balance between supply and demand.

A cool summer in eastern North America has meant much less demand for air conditioning that would have sucked up natural-gas-fuelled electricity. And the annual worry about hurricanes has also abated, with a calm season forecast. The proportion of North American gas that comes from the Gulf of Mexico is shrinking as massive new supplies of onshore “shale gas” come to fruition.

In Alberta, on the Natural Gas Exchange, the price is $2.37 (Canadian) and could fall toward $1, some analysts have predicted.

But industry executive David Yager said other factors – such as the thawing of the credit and equity markets – are positives for gas producers, because many of them will find it possible to raise money to keep going through the downturn. And futures trading points to much higher prices for the winter months. January futures are worth about $5 (U.S.) in New York.

“If you're going to jump out the window, you hit the pavement long ago,” said Mr. Yager, chief executive officer of HSE Integrated Ltd., an energy services company based in Calgary.

“Despite the gas price, things feel better than they did six months ago. Everybody sees this as a fairly short phenomenon. What we're seeing is factored into everybody's thinking.”

Among those hit hardest by low gas prices are provincial treasuries. This week, British Columbia said its deficit for 2009-10 has surged to about $3-billion (Canadian), more than six times higher than estimated in February. Every $1 decline in the gas price hacks $300-million from B.C. revenue. In Alberta, where the deficit is expected to be $7-billion, rather than about $5-billion, a $1-decline guts $1.3-billion from the Treasury.

Lower prices appear to be necessary to choke off more supply, said Martin King, a commodities analyst at FirstEnergy Capital.

“We're not seeing enough supply curtailment to see this market from flooding,” Mr. King said.

In Calgary, especially for smaller companies, it's about making it through the last hard weeks of summer.

“If people see $5 [gas], they'll be very happy,” said Ian Bruce, CEO of investment bank Peters & Co. Ltd. “To me, the big question is the next six weeks.”