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Canada pays for cost structure Oil, gas capital spending cut projected at 36%, compared to 30% in US, 17% worldwide; costs of conventional activity blamed Gary Park For Petroleum News
The evidence keeps pointing to a dismal year in Canada’s oil and gas upstream.
A Tristone Capital study is now projecting a 36 percent drop in Canadian capital spending to C$33 billion from C$52 billion in 2008 — compared with expected cuts of 30 percent in the United States and 17 percent worldwide.
That has carried over to new well permit counts, which hit their lowest opening-quarter point in 10 years, reflecting both the economic downturn and the average cost of producing natural gas in Western Canada.
Tristone analyst John Tasdemir said Canada has been the hardest hit region because the “simple economics of conventional activity” and the complexity of Alberta’s new royalty regime which have “soured the market on drilling” as well as a pullback from the oil sands have all contributed to the slump.
The study found that fewer than half the companies polled were prepared to disclose what commodity prices they used to develop their 2009 capital budgets.
But those that did release forecasts yielded an average US$6.20 per million British thermal units for gas and US$56 per barrel for oil. More than half said they would hike their spending plans if prices rose above US$7.70 for gas and US$79 for oil.
Greg Stringham, vice president of the Canadian Association of Petroleum Producers, told the Calgary Herald that any recovery has to be accompanied by a turnaround in commodity prices, tight credit and inaccessible equity markets.
So far, he said, government intervention appears to be loosening credit markets.
Tasdemir said oil prices have moved in the right direction, “but certainly the gas market hasn’t.”
The study predicted further spending cuts are likely if commodity markets weaken, which is possible in the United States because of high gas inventories and gloomy economic indicators in the U.S.
Tasdemir said some budget adjustments are possible as companies release first-quarter results, starting later in April.
Cheap LNG a challenge The challenge for Canada in particular and North America in general is to combat cheap imports of liquefied natural gas.
Bill Gwozd, vice president of gas services for Ziff Energy Group, told a recent industry meeting that “resistance is futile” as global LNG production rises to a targeted 85 billion cubic feet per day from 70 bcf per day and can be delivered from the Atlantic basin to the U.S. Gulf Coast at US$3 per thousand cubic feet, the equivalent of $2.50 from Alberta once transportation costs are included.
Gwozd said that while gas prices rise and fall, cost structures in North America have moved in only one direction — up, making it difficult to align costs with prices.
He agreed there is a problem rolling back salaries and attracting employees when drilling accounts for two-thirds of finding and development costs, but in order to reflect the price of gas companies must fend off quoted prices for supplies and materials and make other sacrifices.
Gwozd said that “as a society we have to get our costs fixed otherwise we have a problem.”
In 2007, Ziff estimated the average cost structure for a Western Canadian gas producer was about C$7 per thousand cubic feet and C$8 in 2008, excluding a basin differential of another C$1, which Gwozd said was too high when the price of gas averaged C$4.49 on Feb. 20, 2009, compared with C$9.05 in 2008.
Industry virtually stalled Against this backdrop, the Canadian industry is virtually stalled, with no sign of confidence rebuilding among exploration and development companies.
For the first quarter, regulators granted permits for 3,492 new wells — the lowest level since 1999 — compared with 6,954 in the same period last year and a peak 10,944 in 2006.
Of the total, Alberta approved 2,743 licenses compared with 5,437 in the opening quarter of 2008, with oil sands evaluation permits plunging to 1,168 from 2,195.
British Columbia was the only region that emerged relatively unscathed, with its well licenses slipping to 244 from 269.
EnCana retained its leading position, although its permits declined to 637 from 1,124 in the January-March period of 2008, with its gas permits falling to 368 from 809. Canadian Natural Resources slipped to 275 from 314.
In total, the industry licensed only 936 new oil-targeted wells, against 1,740 last year, and 1,588 gas-targeted wells, down from 3,190.
Further evidence of the downturn came from government statistics showing that operators drilled only 432 wells in March, down 64 percent from the 1,189 wells in March 2008 and the fewest for that month since 1992, while the first-quarter tally of wells drilled was 2,971, the lowest count since 1999.
In the well completion category, the count for March was 1,809 compared with 1,917 for the same month last year. The opening-quarter tally was 4,439, off from 4,980 a year earlier.
British Columbia experienced the smallest decline, finishing work on 304 new wells in the January-March period, a drop of 15 percent from 2008, while Alberta dropped 43 percent to 2,215 wells and Saskatchewan nosedived 51 percent to 399 wells.
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