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Randy Eresman, president and CEO, of EnCana Natural Gas, addresses the company's annual meeting in Calgary last April.

Jeff McIntosh/Jeff McIntosh/The Canadian Press

We can all agree that natural gas is a wonderful and better fuel, and that in North America it is crazy cheap from an oil equivalency and a global perspective. But don't mention that to producers like Encana, which, like its American peer Chesapeake, have gone "all in" on gas (though Chesapeake is now diverting capital to oil & liquids) .

Demand has not yet adjusted to the massive structural shift in supply -- a shift that is starting to spread globally.

Thirty natural gas producers represent nearly half the North American natural gas production, so you do not need to look far and wide to see the trends. The key change in the third quarter was EOG Resources, which is now focused on oil and liquids production. EOG's gas production fell 22 per cent on a combination of less drilling and natural gas asset sales.

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Despite the big change at EOG, aggregate third quarter production for the top 30 natural gas producers was only down 250 million cubic feet per day (mmcf/d), from 34.3 billion cubic feet per day (bcf/d) to 34 bcf/d. Thus, the remaining producers were actually up 100 mmcf/d during a time of weak natural gas prices. Natural gas production needs to back off in order to provide some needed price relief to improve economics; but the indicators are just not there.

We have watched Encana sell off assets in an attempt to right-size debt levels, but they, like Chesapeake, any steps to try and increase oil and liquids production levels pale in comparison to their massive natural gas operations. Bottom line, natural gas production levels are not yet showing signs of "waving the white flag". And even if natural gas production fell back and the price lifted, it is likely that the reaction of the producers would be to get the drilling rigs even more busy to bring on supply.

So, what has this meant for the Canadian producers? They have given way to the U.S. producers, who enjoy more robust economics owing to their proximity to final markets (the consumers). Yes, there are exceptions, and yes the Montney region of Western Canada (near the foothills) has enjoyed great success and relatively decent economics (from a North American perspective). Overall North American natural gas production has increased (now about 60 bcf/d), but Canadian production has been falling since 2006. And the U.S. produces nearly four times that of Canada (surprised?) Of the Top 30 North American producers, Canada has eight: Encana (#2, behind Exxon), Canadian Natural Resources, Talisman, Cenovus, Husky, Penn West, Suncor and ARC.

Dirk Lever is a salesman at Commission Direct inc. and was a top-ranked research analyst.

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