Winter ‘toast,’ drillers see crumbs for 2008

Canadian drilling contractors expect rig utilization to hit lowest ebb since 1986-92; braced for further revisions once oil and gas industry understands Alberta's royalty hike

Gary Park

For Petroleum News

Even without knowing the detailed impact of higher oil and gas royalties in Alberta, Western Canada is heading into its crucial winter drilling season in deep trouble and faces what the Canadian Association of Oilwell Drilling Contractors says will be a “sub-economic” year.

CAODC President Don Herring, who had previously said the winter was “toast,” and PSAC President Roger Soucy both said producers and the industry were still calculating the impacts of Alberta’s new royalties, which won’t be implemented until Jan. 1, 2009, but are certain to affect 2008 drilling plans for wells that will be hit with the royalty hikes.

Taking its first stab at a 2008 forecast, CAODC predicts 13,735 wells in the region next year, down 38 percent from the 2006 peak of 22,298 and 26 percent from this year’s expected 16,393 wells. It ties that forecast to price assumptions of US$80 per barrel for West Texas Intermediate crude and C$6.50 per thousand cubic feet for natural gas.

The Petroleum Services Association of Canada is dumping a similar bucket of cold water on its sector, predicting 14,500 wells in 2008, a 17 percent drop from the 17,550 wells anticipated this year, with Alberta facing a 25 percent decline, cushioned only partly by a 10 percent increase in British Columbia and a 3 percent rise in Saskatchewan.

Soucy said “all the indicators are for some negative impacts” from the Alberta changes.

Both trade associations expect to adjust their forecasts as companies develop a better understanding of the new Alberta regime and see what legislation is introduced.

Soucy said the latest numbers “indicate a rather dramatic downturn, which in due course will likely lead to more layoffs.”

CAODC economic analyst Nancy Malone said the uncertainty generated by Alberta’s royalty review process likely contributed to the bleak drilling outlook for 2008 because many companies set their budgets by late October for the upcoming winter season, which traditionally determines whether the calendar year is a success or failure.

Regardless of the Alberta royalties, the upstream sector was in trouble because of low natural gas prices, high operating costs in Western Canada and the high Canadian dollar.

Rig rate forecast at 34%

For successive quarters next year, the rate will be 50 percent, 15 percent, 30 percent and 40 percent, while the rig fleet will slide from 890 to 880, 870 and 860, consistent with industry warnings that a number of existing and newly finished land rigs will be shipped to the United States.

CAODC predicts the number of operating days in 2008 will be 101,640, a decline of 16 percent from this year’s 121,309.

Its outlook for 2007 is consistent with the latest numbers, which show a rig utilization rate of 42 percent for the first nine months, the lowest since 1999. Well permits issued by regulators to the end of September halted four years of successive growth, with exploratory wells off 44 percent from a year ago at 2,902 and development approvals down 22 percent at 11,145.

Herring blamed the grim outlook for 2008 on the slump in gas drilling that started in late 2006 and CAODC now expects to stretch through to at least fall 2008.

CAODC said Western Canadian gas production may already have started to decline from a historic peak, with output down 1 billion cubic feet per day this year from 16 billion cubic feet per day a year ago.

The association said that each billion cubic feet of lost production costs the Canadian and provincial governments C$400 million in lost royalties at current gas prices and under existing royalties.