Canada enters shadows

Rig fleet hits lowest activity since 1993; well permits drop 5.5% in 2007 from 2006; Alberta oil sands, natural gas hardest hit

Gary Park

For Petroleum News

The downturn in Canadian drilling is starting to register with the upstream sector operating at its lowest level in 16 years as low commodity prices, tight credit and Alberta’s new royalties leave their imprint.

The Canadian Association of Oilwell Drilling Contractors reported dismal numbers for Alberta, with only 36 percent of the province’s available 224 rigs at work in the first week of January, half the comparable count in the peak year of 2006.

“Activity is disproportionately lower in Alberta than the rest of Western Canada — part of that is associated with royalties, along with other elements,” said CAODC President Don Herring.

Rig utilization in British Columbia was 62 percent entering 2009, while Saskatchewan was 31 percent, reflecting harsh winter conditions on the Canadian Prairies, with wind chills dropping below minus 50 degrees at times.

John Tasdemir, an analyst with Tristone Capital, said the drop-off in activity indicates the market has a clearer idea of where it is headed as operators lock up what capital they have to concentrate spending on producing assets rather than risky exploration.

He anticipates 14,500 new wells will be drilled in Western Canada this year, compared with an estimated 17,000 (some preliminary industry statistics put the number at just under 16,900, off 9 percent from 2007), and the record 22,000 wells in 2006 when natural gas prices soared amid constrained supply and high demand.

Western Canada exited 2008 with 32 percent of the rig fleet, or 275 units, at work, a sudden plunge from earlier in the month when the count was 440 rigs on Dec. 16 and 398 on Dec. 18.

Active rigs in Western and Northern Canada were actually up 8 percent from 2007 with an average 402 of 855 rigs active through the year (a 47 percent utilization rate), compared with 43 percent in 2007, or 371 of 864 rigs.

Alberta accounted for 265 active rigs, one less than in 2007 and the lowest tally since 2002, compared with 2005’s record 398. Saskatchewan had a record average of 67 rigs at work, up from 47 in 2007 and beating the previous high of 52 in 2005; British Columbia recorded a 23 percent gain in rig activity, with 64 rigs working, compared with 52 in 2007 and the record 74 in 2005; and Manitoba edged up to six rigs from four.

One of the strongest barometers of industry intentions — the approval of well licenses by government regulators — showed 23,919 permits were issued in 2008, off 5.5 percent from 2007’s 25,313, but far behind the record 30,917 in 2005. Typically about 15-20 percent of licenses are allowed to lapse.

Evidence of a looming downturn surfaced in December when 2,633 licenses were granted across Canada, a drop of 41 percent from a year earlier, with the heaviest blow occurring in the oil sands evaluation sector when well approvals slumped to 1,045 from 2,686 in December 2007, with the 2008 tally dropping to 3,562 from 5,121.

Alberta also took a hammering in the natural gas category, with 12,062 licenses granted for gas and coalbed methane prospects, the lowest since the 1990s and a drop of 5 percent from 2007, including a 16 percent decline in conventional gas permits to 7,264, less than half the peak year of 14,945 in 2004.

British Columbia defied the recessionary mood by granting 591 new permits in the final quarter, up 190 from the same period of 2007, and logged 1,398 licenses for 2008, an increase of about 20 percent.

Saskatchewan issued 5,077 permits, easily eclipsing its previous record of 3,831 set in 2007, with oil targets accounting for 3,169 licenses. Manitoba was unchanged from 2007’s 335 permits, but Eastern Canada’s offshore recorded a sharp decline to 90 from 143.

Leading operators were EnCana with 3,446 permits (against 4,275 in 2007), Husky Energy 1,514 (1,289) and Canadian Natural Resources 1,509 (1,200).