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Bears mixing with bulls in Canada
Gary Park For Petroleum News
Unconventional drilling aimed at shale gas and tight oil formations is the engine that is powering another hike in projected Canadian upstream activity this year, although the mood is not overwhelmingly bullish.
The Petroleum Services Association of Canada estimates drilling will be completed on 11,250 wells this year, up 35 percent from the final count of 8,350 for 2009 and up 40 percent from its original forecast of 8,000 wells that was revised to 9,000 in January.
BMO Capital Markets analyst Mike Mazar is less buoyant in his predictions, sticking with about 10,100 well completions in Western Canada (the vast bulk of all wells drilled across Canada), citing depressed natural gas prices.
PSAC’s latest target is based on gas prices of C$4.25 per thousand cubic feet at the AECO trading hub and crude oil prices of US$82 per barrel for West Texas Intermediate.
PSAC President Roger Soucy said downsizing in the supply and services sector has, at worst, flattened out, while hiring is taking place in some pockets, such as pumping services and services related to shale development.
New technologies He said horizontal drilling and multistage fracturing have created opportunities for his member companies, as wells penetrate deeper into formations and take longer to drill, helping offset a slide in conventional oil and gas drilling.
“We are seeing some (new technology) taking hold in the shales, but I believe this trend will need to be expedited to maintain the economic viability of the Western Canada Sedimentary basin,” Soucy said.
PSAC expects 7,590 wells will be drilled in Alberta, an increase of 31 percent over 2009, while British Columbia will dip 2 percent to 560 wells, Saskatchewan will soar 47 percent to 1,750 and Manitoba will rocket up by 106 percent to 475.
Mazar said BMO’s outlook is influenced mostly by its bearish view of gas prices and a degree of skepticism about the prospects after spring thaw.
But Mazar admitted he is naturally pessimistic. “I’m the guy who reads the last chapter of a new book I just bought first so that in case I die … I can figure out how it ends.”
However, in general, he said BMO is “not down on the industry forever. We don’t think it is indefinitely impaired. It has certainly shifted. … The shift towards horizontal and directional drilling provides opportunity, but provides some challenges as well.”
Mazar believes crude oil is reasonably valued in its current price range, but is not counting on further increases, given the 60 million barrels of “floating inventory right now.”
Demand recovery set at 2012 He said BMO has extended its demand recovery expectation to 2012 from its earlier target of the third quarter of 2011 and forecasts the gas sector faces continued rough times, because of high storage levels and shale gas economics.
“If you look at it on a full-cycle basis including a 10 percent return on capital, you’re looking at an average of under $5 (per thousand cubic feet) for these shale plays in terms of their supply costs.”
Soucy said he is hopeful the Alberta government’s recent royalty changes point to an improved relationship with the industry, although the proof will have to wait for final details.
“It has been a difficult couple of years (since the first overhaul of Alberta’s royalty framework was announced) and the progress to date has been encouraging,” he said.
Joe Bruce, chief operating officer for Nabors Canada, said he was “in between bearish and bullish. From a drilling perspective, there’s a lot more optimism. We do believe that there is an indication activity is going to pick up this year from last.”
He said Nabors would not announce how many rigs it will deploy in 2010 until the Canadian Association of Oilwell Drilling Contractors sets its outlook.
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