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Uncertainty rules in Canada Hints of stabilizing gas prices, easing of service costs fails to sway operators Gary Park For Petroleum News
One says the glass is half full, one says it’s half empty and one isn’t sure either way.
In the space of 24 hours at the start of May, three of Canada’s key barometers to the health of the natural gas industry offered widely varying perspectives on the outlook for the sector.
Apache, which also has a heavy commitment to oil prospects, hinted it may be on the verge of booting up its activity, encouraged by a decline in service costs across North America; Canadian Natural Resources said that even if commodity prices stabilize it’s not likely to increase drilling this year or next; and Devon Energy wants to monitor service costs more closely before making a call.
Apache might accelerate Apache Chief Executive Officer Steve Farris told a conference call that if operating costs continue on their downward path, his company might be ready to accelerate shallow drilling later this year.
He said a decline in costs across North America has been “more pronounced” in Canada.
Farris predicted that the cost trend will continue because a slowdown in Canadian drilling is dragging down service costs.
Apache originally budgeted to complete 384 wells in Canada in 2007, down 490 from 2006 when exploration and development spending of US$1.1 billion was concentrated on shallow conventional and unconventional drilling locations.
He said Apache has substantially completed its three-year farm-in program with ExxonMobil in Canada and has now identified two high-gas-potential areas in northeast British Columbia and northwestern Alberta.
The company’s annual report said Apache has acquired 477 square miles of three-dimensional seismic over the South Grant area, part of the ExxonMobil farm-in in central Alberta.
Using the new data, Apache said it has generated several structural prospects to depths of 13,000 feet in Mississippian-age formations.
Northern Alberta and British Columbia and southwestern Alberta have been the focus of most of Apache’s drilling so far this year, but if shallower prospects are pursued that would involve coalbed methane plays in the North Grant, Nevis and Provost areas of south-central and southeastern Alberta.
Canadian gas production of 383 million cubic feet per day in the first quarter was down only fractionally from a year earlier, while oil and natural gas liquids eased to 21,264 barrels per day from 23,869 bpd.
The company projects overall Canadian production will be up 4 percent this year to 90,000 boe per day, including 106 million cubic feet per day of gas from the ExxonMobil leases.
Canadian Natural won’t revive drilling Canadian Natural, Canada’s No. 2 producer after EnCana, is at the other end of the optimism scale, rejecting any notion that it might revive drilling in 2007 or 2008 even if gas prices stabilize.
In fact, it’s moving in the opposite direction, sacrificing production from today’s 1.74 billion cubic feet per day to slash service and supply costs.
Despite hitting record production of 1.69 bcf per day (371 million cubic feet per day from its purchase of Anadarko assets last year) the Calgary-based independent sees better returns from its heavy-oil operations than gas.
Steve Laut, president and chief operating officer, said operating costs have a long way to come down before his company would shift resources to gas.
He told Canadian Natural’s annual meeting that the cost of drilling gas wells is the biggest challenge facing the company, followed by doubts caused by carbon regulations and Alberta’s royalty review.
The company slashed its first quarter gas drilling to 201 net wells compared with 440 a year earlier and plans to participate in only 250 wells for the rest of the year.
Its strategy was explained by Chairman Alan Markin, who said that through “focused execution we have been able to maximize the efforts of our winter natural gas drilling program.”
The shift from the opening quarter of 2006 “allowed us to concentrate on operational efficiencies as we were able to maximize the value of every dollar spent” by achieving record production while remaining within the original budget.
Devon hedging bets Devon is hedging its bets, saying its Canadian gas activity will increase if the cost environment improves, but it will need to monitor trends over the next two months before making a final call.
Stephen Hadden, senior vice president, exploration and production, told a conference call that although Devon drilled 307 Canadian wells in the first quarter it has pulled back from conventional gas activity because of an “overheated cost environment.”
He said Devon remains “very pleased with the resource base” in Canada as well as the production rates that can be attained from gas drilling, but “costs simply just got too high for us to continue to invest there vs. other alternatives we have in this very broad portfolio.”
Devon’s first-quarter production in Canada averaged 189,818 barrels of oil equivalent per day from oil, gas and natural gas liquids.
Industry doesn’t see early turnaround The industry-wide mood seems to lean decisively away from an early turnaround in gas operations.
The Petroleum Services Association of Canada again took the knife to its well-completion forecast for 2007, predicting 19,200 wells across Canada, down 18 percent from the 2006 total and off 15 percent from its original forecast, basing its outlook on average WTI prices of $62 per barrel and AECO gas prices of C$7 per gigajoule.
It said the decline in gas drilling will more than offset an expected 15 percent gain in oil well completions.
That is mirrored by activity over the first four months, which slumped in April to the lowest point since 2002, with only 10 percent utilization of Canada’s 836 rigs and a year-to-date average of 433 working rigs.
PSAC President Roger Soucy said operators “lost confidence in gas pricing sometime last summer.”
“They have decided to stay with their budgets of last fall until they become confident that gas prices will stay at (current) levels and maybe increase a little before considering activity increases,” he said.
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