With so much uncertainty today surrounding the stability of global oil and gas supply, Canada is being viewed more and more as a safe harbor for the U.S, in terms of meeting rising energy demand, particularly as that demand relates to natural gas. Indeed, Canada is the largest foreign gas supplier to the U.S., currently exporting 3.4 trillion cubic feet (Tcf) of gas annually to the Lower 48. Put another way, about 15% of all the natural gas consumed in the U.S. comes from Canada. Meanwhile, during this time of turmoil in Iraq and other parts of the Middle East, security of oil supply is also looming as a much larger issue for the U.S. There again, Canada has the potential to allay much of that concern, given its massive oil-sands deposits, recently estimated at 175 billion barrels. These petroleum deposits are, in fact, the largest in the world behind those of Saudi Arabia. To find out more about Canada's current and future hydrocarbon supply picture and the breadth of its recent upstream activity, Oil and Gas Investor recently met with Greg Stringham, vice president of markets and fiscal policy for the Canadian Association of Petroleum Producers (CAPP) in Calgary. A nearly 20-year veteran of the Maple Leaf oil patch, Stringham began his career with Syncrude, the 12-company consortium that runs the giant Canadian oil-sands project in northeast Alberta. He also worked several years for the Alberta provincial government on energy-policy issues before joining CAPP eight years ago. Investor What was the level of drilling activity in Canada last year and what's the outlook for it this year? Stringham Canadian rig activity in 2003 reached record levels. Overall, there were nearly 20,000 wells drilled, most of them for natural gas. Comparatively, first-quarter drilling this year was up 37% from the same prior-year period and up 91% from the comparable 2002 period. In 2004, gas drilling will still dominate the rig count, accounting for some 15,000 wells out of an expected 20,000-plus total well count. Investor What about annual production growth? Stringham Gas output was down slightly in 2003 from the average 6.3 Tcf we produce in Canada annually. However, as the result of record drilling activity in first-quarter 2004, we see annual gas output this year climbing back to around 6.3 Tcf. Investor And on the oil side of the equation? Stringham Our average crude oil output-2.5 million barrels per day-was up slightly last year because a major oil-sands project, Shell Albian in northeastern Alberta, came onstream. In fact, by the end of 2003, 1 million barrels per day of crude output was coming from Canadian oil-sands production alone. This year, we expect Canada's overall daily crude output to grow further, in no small part propped by increasing oil-sands production, which is expected to reach 1.8 million barrels per day by 2010. One should remember that in western Canada, there's an estimated 175 billion barrels of oil-sands reserves in the ground. To put this immense reserve base in perspective, it would take-at current production rates at our existing oil-sands operations-about 400 years to deplete those reserves. Investor On the gas side, where is most of the drilling in western Canada taking place? Stringham The highest gas-producing wells are being drilled right along the Foothills Front in northern Alberta and northeast British Columbia; however, the largest number of gas wells-about 65% of the 15,000 wells I mentioned-are being drilled in the shallow-gas regions of southwestern Alberta and southwestern Saskatchewan. Investor What's the remaining gas resource base in Canada? Stringham There's an estimated 363 Tcf of remaining gas resource potential. Importantly, this figure does not include an estimated 167 Tcf of untapped natural gas potential from Canadian coalbed-methane (CBM) resources. Fewer than 800 CBM wells have been drilled in Canada in the past 20 years; however, there's likely to be 1,150 wells drilled in 2004, ramping up to 1,500 in 2005. Investor What has the recent Canadian gas-export picture looked like, with respect to the U.S.? Stringham On average, we export annually to the U.S. some 3.4 Tcf of gas-more than half our yearly domestic output of 6.3 Tcf. Last year, however, those exports were down slightly due to several factors. First, overall U.S. gas demand was down about 5% in 2003 at the same time Canadian gas production was also down slightly. Meanwhile, with the start-up of the Kern River Pipeline from the U.S. Rockies, some of the Canadian gas that would normally go into California went into storage in Canada by mid-year. This past winter, however, that supply came back to meet the severe cold snap in the U.S. Northwest. So the capacity is there to meet U.S. gas demand-not just now but in the future-from the resource potential I've already mentioned. I would also point out that prospects for pipelining Arctic gas from Canada's Mackenzie Delta into the vast Canadian and U.S. pipeline network look promising. An application for a pipeline through the Mackenzie Delta is expected in mid-2004, with gas flowing by late 2008 or early 2009. Investor What about oil exports to the U.S.? Stringham Of the overall 2.5 million barrels per day produced in Canada, some 1.6 million barrels is exported to the U.S. I would add that we expect conventional oil production off Canada's East Coast-currently 330,000 barrels per day-to grow to nearly 500,000 daily barrels by 2006 when White Rose joins the existing Hibernia and Terra Nova projects. Investor What's the biggest challenge currently facing the Canadian oil and gas industry? Stringham Access to resources, timely regulatory processes and implementing new technology to lower costs are, of course, key factors for Canadian producers. But equally important is access to markets-ensuring sufficient pipeline capacity for oil and gas to get where those commodities are needed. For natural gas, current pipeline capacity is sufficient and diversified enough that Canadian gas can move to markets domestically and in the U.S., as market demand changes. For oil, while a few small pipeline expansions are under way, the anticipated huge growth in oil-sands production that I mentioned between now and 2010 is leading to significant analysis as to what markets this growth will be targeted. While the U.S. is an obvious market, we've also had inquiries about directing some of our growing oil-sands supply to places like China, Taiwan and Korea. Investor How much capital infusion or upstream spending are you seeing within the Canadian E&P sector? Stringham Investment in the Canadian oil and gas sector is close to, if not at, record levels. For instance, in 2003, we saw some US$20 billion invested in the upstream-most of that coming from the cash flows of producers; the balance, from the Canadian financial markets. Investor Do you see any step-up in M&A activity this year, particularly crossborder transactions? Stringham We had a very large influx of U.S. investment around 2001 with Burlington acquiring Canadian Hunter, Anadarko acquiring Berkley and Devon acquiring Anderson. Future activity like that, however, depends on many factors, including one's perception of the maturity of Canada's western basin. We view the basin as relatively young versus the U.S., at least on the natural gas side. In fact, if one compares Canada's western basin with the Anadarko Basin, the Permian Basin and the onshore U.S. Gulf Coast, we're about 12 to 15 years behind, in terms of maturity. Also, crossborder M&A activity depends on currency-exchange rates, the prospects for CBM, oil-sands development and the timing of bringing on Mackenzie Delta gas-from an initial 1 billion cubic feet (Bcf) per day to as much as 1.8 to 2 Bcf per day. But let's not forget, although much of the publicized crossborder M&A deals in recent years has spotlighted U.S. producers acquiring Calgary operators, the deal flow works the other way as well, as we saw this April with EnCana Corp.'s agreement to buy Tom Brown Inc. for US$2.7 billion. Investor What's the biggest thing you think North American producers and investors should understand about the Canadian oil and gas industry? Stringham That Canada is, and will continue to be, a vital part of U.S. energy supply. Natural gas exports from Canada to the U.S. have, in fact, doubled during the past decade and while they've flattened out recently, don't assume they're going to be falling off. Canadian CBM and Mackenzie Delta gas output have not even been touched yet. Also, as I mentioned, oil-sands production in northern Alberta is growing quickly. The important thing to note is that the oil and gas trade between Canada and the U.S. is working very well. It is, in fact, a model from which other countries can learn a great deal. M