Shale gas producers in Western Canada are responding to plunging natural gas prices by slashing their 2016 budgets. NuVista Energy Ltd. has cut its budget in half, while Encana Corp. and Painted Pony Petroleum Ltd. have cut their budgets by 25 per cent as natural gas prices sink to some of the lowest levels of the past decade. "Companies are becoming quite challenged into the next year in terms of investment and how much money they're going to be able to put into the ground just because commodities have come down so much," said CIBC analyst Adam Gill.

But nonetheless production should still go up next year, Gill added, thanks to decreased labour and services costs and generally improved efficiencies. "While we are seeing budgets get cut, what is changing is we're seeing a big capital efficiency improvement," said Gill. Gill is forecasting an 18 per cent increase in production next year, better than the 15 per cent growth this year. NuVista Energy, for example, says it expects to see overall capital efficiencies improving from $26,900 per barrel of oil equivalent per day this year to under $14,000 in 2016. The cost savings means the company still expects to see a roughly seven per cent increase in production next year compared to this year's fourth quarter, even though it slashed its budget in half.

Painted Pony, meantime, expects to see a 44 per cent increase in production next year despite its budget cuts, while completion of the AltaGas Townsend gas facility near the end of next year will mean a 150 per cent increase in production for the company. Gill said companies are also benefiting from significant investments in infrastructure and facilities and are now able to spend more on drilling, with 77 per cent of budgets going towards drilling next year compared with 62 per cent this year. "More money is going into the bit," said Gill. Another analyst sounded a more cautious tone, pointing out that many company budgets are based on natural gas prices improving. AltaCorp Capital's Patrick O'Rourke says that could be challenging with a mild winter and high storage volumes. "It's looking like it's going to be a warmer winter, it's looking like the draws on storage are going to be severely down from where they have been the last few years," said O'Rourke. The poor outlook helped push New York benchmark spot prices as low as US$1.82 per thousand cubic feet in trading on Tuesday, down more than a third compared with a year ago. Alberta AECO storage hub prices are trading at $2.32 per gigajoule for December, according to the NGX exchange, compared with $3.62 per gigajoule last year. O'Rourke said that with the price volatility, some companies are building flexibility into their budgets. Tourmaline Energy said it plans to spend $1.1 billion if Alberta natural gas prices stay in the $3 to $3.50 per thousand cubic feet range, which would mean a roughly 27 per cent budget cut compared with this year. But if prices rise above $3.50 per thousand cubic feet, the company plans to spend $1.35 billion. The spending plans mean production would go up an estimated 26 per cent and 39 per cent respectively to 200,000 and 220,000 barrels of oil equivalent per day, but the company did not specify how it would budget if natural gas stays below $3 per thousand cubic feet.