Natural gas profits this year will fall to less than half what they were last year, says a report released Friday by the Conference Board of Canada.

Industry-wide, profits will fall by more than 60 per cent, according to the Conference Board's report Canadian Industrial Outlook: Canada's Gas Extraction Industry, Summer 2009. The report predicts profits will total $2.3 billion this year, the lowest for the gas industry since 1999. Profits should start growing again starting in 2010 as prices for natural gas improve.

Canadian natural gas production will fall for the next four years, the Conference Board of Canada predicts. (CBC)

"Last year, revenues more than doubled over the first six months as gas prices skyrocketed," says Conference Board economist Todd Crawford in a release. "Now, low prices and the tough credit conditions have created a perfect storm that sent drilling activity in Canada tumbling this year. "

The board says the slump in industry demand for materials such as steel will mean costs will fall 13 per cent this year. However, that will be only temporary. Costs will rise along with the price of oil, and the gas industry competes with oil producers for much of the same labour and materials.

Gas production fell 5.2 per cent last year and the board forecasts a similar drop this year. The report predicts further declines in each of the next four years.

The report comes one day after a National Energy Board forecast that predicted the slowdown in drilling will put a "significant dent" in gas supplies over the next two years.

Prices plummet

Demand for gas has fallen with the recession, and storage facilities across North America are close to full. Prices have fallen from a record high of $13 US per million British Thermal Units in July of 2008 to about $3.50.

Oil prices have rebounded somewhat during the same period, partly on indications of pickup in growth in emerging economies. Gas is different, and unlike oil — which is a globally traded commodity — and trades almost entirely only within North America.

S&P/TSX Energy Sub-ndex 3-month chart

Drilling in Canada and the U.S. has slowed with falling prices, and some Canadian producers have turned off production from some of their wells. There were 199 drilling rigs active in Western Canada on Sept.1, compared with 412 on the same date in 2008.

Natural gas drilling accounted for two-thirds of Canada's oil and gas industry activity last year, according to the Calgary-based Canadian Association of Petroleum Producers.