Fortress under siege

Alberta drilling budgets, well completions, upstream outlook all in decline; exploration drilling off 25%, development 5.5%

Gary Park

For Petroleum News

The evidence keeps pointing to an erosion of the Canadian petroleum industry’s stronghold in Alberta, where drilling budgets, well completions and the upstream outlook are all in decline.

For the first nine months of 2008, Saskatchewan, powered by record high oil prices, claimed almost 23 percent of Canada’s total well depth, compared with just under 23 percent in 2006.

Gas-weighted British Columbia edged up to 9.4 percent from 8.5 percent last year, although fractionally behind the 9.5 percent mark it achieved in 2006.

Alberta tumbled over the two years to 65.7 percent from 75.5 percent.

For all of Western Canada, drillers accumulated 15.98 million meters of hole in the January-September period, a mere 84,857 meters behind 2007, but lagging far behind the record 21.24 million meters in 2006.

Alberta’s exploration activity nosedived 25 percent this year to 2.55 million meters, the poorest showing in 11 years, while development drilling in the province dropped 5.5 percent to 7.96 million meters.

British Columbia exploration drilling was off 7.6 percent because of the slump in gas prices to 409,582 meters, but development drilling rose 19 percent to 1.09 million meters.

Saskatchewan success story

Well completion numbers reinforce Saskatchewan’s position, with rigs released on 2,911 holes for the first nine months, up 15 percent from 2007, while Alberta was off almost 16 percent at 8,262 wells and British Columbia dipped 5 percent to 644 wells.

Southeastern Saskatchewan is posting the largest gains of any play in Western Canada, finishing 997 wells, up 281 from the same period last year, led by Crescent Point Energy Trust (268 wells), Petrobank Energy and Resources (122) and TriStar Oil & Gas (112).

The only region in Alberta to show any growth this year is the east-central portion, where 1,078 wells have been drilled, 22 more than last year.

Elsewhere in Canada, the Northwest Territories has seen six wells completed, compared with eight in 2007.

CAODC well target down

Based on an equivalent West Texas Intermediate price of C$99 per barrel for oil and an AECO gas price of C$7.30 per thousand cubic feet, CAODC forecasts 14,325 wells in 2009, down 6 percent from its revised 2008 total of 15,223, a 20 percent drop from last year’s 19,144 wells.

But it’s not all bleak news, according to CAODC President Don Herring, who says that despite the continuing downward trend “there are a couple of messages inside the forecast that have an optimistic tone to them.”

He said the current generation wells are longer, given the growing emphasis on horizontal wells, and some are concentrated on areas that “show some exciting promise.”

CAODC predicts an average rig utilization rate of 42 percent from the active rig fleet, which has grown to 373 from 336. For next year, it expects a drop to 348 active rigs, or a 39 percent utilization rate for a total fleet that is predicted to reach 880 units. Operating days in 2009 are forecast at 129,256 compared with 140,388 this year.

Rig usage down in Alberta

Among other forecasters, FirstEnergy Capital projects 17,681 wells this year, dropping to 17,100 in 2009, with rig utilization of 44 percent this year and 43 percent in 2009. It is counting on a WTI price of US$115 per barrel.

Because of a decline in commodity prices stripping, which will cut into cash flows, and the state of credit markets, Peters & Co. is predicting 16,500 wells in 2009, down 4,000 wells from its target earlier this year.

The investment dealer estimates an Edmonton par price of C$85.27 per barrel for oil and an AECO price of C$7.81 per thousand cubic feet.

UBS Securities is taking a much bolder view, estimating Canada will have a well count next year of 18,000, although that is down from its previous forecast of 20,000 wells.

For the January-September period, the most active drillers were EnCana 1,900 wells (down from 2,911 in 2007), Canadian Natural Resources 774, Enerplus Resources Fund 495 and Devon Canada 415.

EnCana drilled 2.34 million meters, trailed well back by Canadian Natural Resources at 943,456 meters and Husky Energy at 780,967 meters.

Rig crews want pay boost

CAODC President Don Herring said the increase is needed to retain skilled workers, arguing his association had “little choice but to respond to the needs of our people and adjust wages (entering the peak winter drilling season).”

He said there has been no indication from exploration and production companies that they are “failing to maintain cost of living increases for their own people and, frankly, if it’s fair for them it’s fair for our people.”

The 2008 proposed rates range from an increase of C$2.75 an hour for drillers to C$40 and a C$5 an hour rise for lease hands to C$26. For a five-member crew running a 12-hour shift, the pay scale represents an 11 percent across-the-board increase.

John Tasdemir, an analyst at Tristone Capital, said that what CAODC may have thought was realistic a month ago is now questionable.

He wondered whether energy markets in Canada would be able to support such an increase.

However, Galleon Energy drilling manager Ryan White said that although the timing was “not the best,” the service industry is faced with a challenge to attract skilled people back to rigs.

But he said that if rig utilization falls short of expectations this winter E&P companies will likely ask the contractors to renegotiate some rates.

—Gary Park