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Encana says labour and steel costs increasing in energy sector

Natural gas producer forecasts inflation in energy sector between seven to nine per cent this year


October 5, 2011
by The CANADAN PRESS

CALGARY—Encana Corp. says it sees costs of labour, steel and services rising in the energy sector, but inflation will be less severe than industry average.

The head of the company’s Canadian operations says oil price fluctuations have significant impact on its costs, despite Encana’s primary interests in natural gas.

That’s because oil and natural gas producers compete for much of the same equipment and services.

“These inflationary pressures are expected to recede in the coming years as new equipment becomes available in the market,” says Mike Graham, executive vice-president of Encana Canada.

Graham says the natural gas-producer forecasts cost inflation in Canada’s energy sector this year between seven and nine per cent.

However, he predicts Encana will realize a four to six per cent inflation rate.

He owed some of the success to Calgary-based Encana’s manufacturing-like approach to producing natural gas using so-called “resource play development hubs.”

The hubs are centred around large tracts of land that touch each other and contain a high concentration of gas.

It can drill up to 16 horizontal wells into the shale rock from a single pad, reducing surface footprint and lowering costs.

The company also looks to ink long-term contracts with suppliers so it has some certainty over future costs. Graham says the goal is to reduce supply costs to $3 per 1,000 cubic feet over the next three years.

Encana is one of North America’s largest natural gas producers, with holdings in northeastern B.C., Louisiana and Texas.

As it struggles with low natural gas prices, the company has been chasing after lucrative liquids-rich reservoirs.

The company has also partnered in a project to ship liquefied natural gas off the B.C. coast by late 2015 to fetch higher prices in Asian markets.

In the meantime, Encana has been selling non-essential assets to bring in cash.