Service sector faces summer heat

Fallout from slump in gas prices forces drillers to lower well completion forecast by 9%; major producers ready to take advantage

By Gary Park

For Petroleum News

A sticky summer lies ahead of Canada’s service sector with the forecast well count for 2006 trimmed by 9 percent and the dive in natural gas prices taking a bite out of rig rates.

The Canadian Association of Oilwell Drilling Contractors delivered some of the most troubling news when it lowered its well completion target to 23,827 from 26,070, partly because of an extended spring break-up, the cancellation of some shallow gas drilling programs and a shift in targets to oil from gas.

Compounding those setbacks, the association said the biggest challenge for the second half of 2006 will be to find skilled labor in a difficult recruiting environment.

However, the association said its new well target is still up 7 percent from last year and the rig fleet is expected to continue its growth from 814 this month to 850 by year’s end.

The Petroleum Services Association of Canada is still predicting 26,725 wells for 2006.

With natural gas prices expected to remain stuck in the US$4-$5 per thousand cubic foot range through summer, shallow gas and coalbed methane activity will suffer, said Roger Serin, an analyst with TD Newcrest Securities.

CBM permits flat

Serin said producer cash flows will probably fall C$5 billion short of an earlier forecast of C$58 billion, although drilling expenditures will account for 43 percent of cash flow or C$23 billion.

Not everyone is troubled by the swings in fortune, with chief executive officers of major E&P companies noting that softer gas prices have put the brakes on accelerating upstream prices and eased what had been a tight rig market.

The heads of EnCana, Talisman Energy and Canadian Natural Resources said there are early signs that the costs of rigs and related services might even wilt.

Speaking at a Canadian Association of Petroleum Producers symposium, they said budget pruning means the service sector is less busy and costs will drop.

EnCana’s Randy Eresman said he expects cost “rollbacks could be as significant as inflation growth has been in the past” — a two-year trend that has placed the Western Canada Sedimentary Basin among the highest cost basins in the world.

EnCana, which removed US$300 million from its gas exploration and development program early this year and has hedged 95 percent of its production at about US$7.30 per million British thermal units, is now positioned to take advantage of cheaper rig rates, he said.

Eresman declined to predict how much service costs might decline, but, because they have climbed 15 percent year-over-year since 2004 “you would expect the rollbacks could be as significant.”

Canadian Natural’s John Langille said the downturn in drilling will force service providers to trim their costs and his own company may resume programs if gas prices stay weak.

He would not be surprised “if a lot of other companies don’t start doing similar things too.”

Canadian Natural said last month it would drill 13 percent fewer gas wells this year than in 2005, but the budget would be C$1.79 billion, 3 percent higher than originally forecast.

Talisman’s Jim Buckee, whose company has held the line on its budget because it has entered into long-term contracts with contractors, said he has heard that rigs are more available.

He said it is possible many smaller and independent North American gas producers are scaling back on drilling plans in anticipation of a price recovery this winter.

However, Talisman has no intention of pruning its spending plans because its projects are economic at US$4 per million Btu, comfortably below the most recent prices of closer to $6.60, he said.

“People would have died for $6 not very long ago,” Buckee said. “We’re making lots of money at these prices.”