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Upstream heads downhill Western Canada reeling as drilling, well permits, land sales crumble in the face of tight financial markets, cratering gas prices Gary Park For Petroleum News
Even with land at basement-price levels, the major operators are turning their backs on government auctions in Western Canada, with returns for the three leading provinces totaling C$73.36 million for the first two months compared with C$393.42 million last year.
It’s small comfort to Alberta, which has been clobbered since unveiling its royalty increases, but Saskatchewan and British Columbia, which have been a major drain on upstream spending in Alberta, are reeling from this year’s land sale results.
The downturn is being accompanied by wave after wave of negative forecasts for the natural gas sector, on top of the slide in conventional oil and oil sands activity.
Statistics compiled from provincial government regulators show operators released rigs on 1,400 wells in January, off 28 percent from a year earlier and barely half the benchmark performance in 2006, while licenses issued for new wells totaled 1,867, down 49 percent from January 2008, with Alberta slumping to 1,613 permits from 3,177 a year ago and a record 3,569 in the first month of 2006.
Those numbers have forced the Canadian Association of Oilwell Drilling Contractors to downsize its 2009 forecast to 11,176 well completions, 22 percent or 3,100 wells below its original forecast issued four months ago and only half the completions in 2005 and 2006.
That is the first time in more than 20 years that CAODC has revised its projections in the middle of the peak winter drilling season.
CAODC President Don Herring said in a statement that the industry’s best hope now is for a recovery in the second half of 2009.
The association expects an average 333 rigs from a fleet of 860 will be active in the first quarter for a 39 percent utilization rate, compared with 497 of an available 887 rigs in the same period last year.
The last time the utilization rate dropped below 40 percent was in 1992, when it nosedived to 32 percent, its lowest level in 30 years.
CAODC predicts the second quarter utilization rate will drop to 10 percent from 17 percent last year, with the average number of working rigs dropping to 86 — a level last seen in 1992 — then climb back to 31 percent in the third quarter and 42 percent in the final quarter, compared with 46 percent and 40 percent, respectively, in 2008.
For all of 2009, CAODC is counting on an average 262 rigs remaining busy for a rate of 30 percent, down from 351 rigs and 40 percent in 2008.
Based on $50 WTI Its outlook is based on average commodity prices of $50 per barrel for WTI crude and C$7 for thousand cubic feet for gas.
The Petroleum Services Association of Canada updated its forecast in late January, projecting 13,500 well completions, off 21 percent from its final tally for 2008.
Well completions for January were the lowest since 1999, with Alberta declining by 30 percent and Saskatchewan 4 percent, but British Columbia, driven by its shale and tight gas prospects, rose 6 percent to 164 wells.
Operators reported 204 exploratory wells, down 50 percent from January 2008, while development wells fell 19 percent to 1,196.
Of the licenses granted by the Alberta Energy Resources Conservation Board conventional crude permits plunged to 67 from 235 in January 2008 and conventional gas declined to 525 from 1,077, leaving oil sands activity to make up the balance.
British Columbia approved 71 well applications, off seven from a year ago, and Saskatchewan was off 224 wells at 151.
Of the leading operators, EnCana dropped to 350 permits from 650 and Canadian Natural Resources was down 41 licenses at 106.
Land sales down Further mirroring the grim mood, the Alberta government’s three land sales in January and February totaled C$42.35 million at the year’s first three auctions, compared with C$86.05 million last year, while average per-hectare prices dropped to C$127 from C$299.
Saskatchewan’s single sale in the first two months fetched a dismal C$6.3 million, in sharp contrast to its C$197 million in the first auction of 2008.
Energy and Resources Minister Bill Boyd said the results were “not entirely unexpected,” pinning most of the blame on the 75 percent drop in spot oil prices over the past seven months and tighter financial markets.
British Columbia, easily the pacesetter in Canadian land sales last year, has also made an undistinguished start to the year, taking in C$24.71 million from two auctions compared with C$125.48 million to the end of February 2008.
The only bidding of note came from Progress Energy, which acquired 16,620 hectares of Montney prospective lease rights at an average C$792 per hectare, while BP Canada Energy paid about C$12.208 per hectare for portions of land northeast of Tumbler Ridge.
Progress Chief Executive Officer Michael Culbert said the Montney results have been so encouraging his company intends to keep building its position in the region.
BMO Capital markets analyst Mark Leggett said Progress is taking advantage of cheap land that is influenced by low gas prices and a shortage of capital.
Gas outlook dismal The outlook for gas is dismal according to assessments by leading analysts in late February.
Chris Theal, managing director of energy research at Tristone Capital, told a conference that the North American market will shut in 750 billion cubic feet during the upcoming injection season because of oversupply and depressed prices.
Tristone is targeting average prices for this year of $4.25 per million British thermal units at Nymex and $6.75 in 2010.
The firm is forecasting U.S. storage will reach 3 trillion cubic feet in late July and 4 billion to 6 billion cubic feet per day of shut-in in September and October, with fall prices below $3 per million British thermal units.
He said rig counts in Western Canada are at lows not seen in many years, with British Columbia and Saskatchewan within five-year ranges and Alberta bleeding, which Theal predicts will cause a 5 percent drop in gas supply to 14.5 bcf per day this year.
He said the last three major recessions suggest industrial utilization will take 15 to 18 months to regain pre-recession levels.
Gas operating costs up Calgary oil and gas consultant Paul Ziff, of Ziff Energy Group, said only 10 percent of 80 North American gas plays are economic at current prices, but the study did not identify those plays.
Finding and development costs in 25 supply basins average all-inclusive costs for new gas of $7 per thousand cubic feet.
He said new gas has not been “particularly economic,” adding that either lower costs or incentives are needed to boost activity.
“If you look at the last three to four years, the average company is making hardly any return on gas spending,” Ziff told the Economics Society of Calgary.
Operating costs for new gas in Western Canada soared 147 percent in the 2000-07 period, while costs for oil rose 156 percent.
The study listed the Canadian Foothills as the most expensive of the 25 supply basins.
The most encouraging news comes from the shale gas plays, which Ziff said are among the most economic when “they are up and running,” especially for producers who made early purchases of land in Haynesville in Texas and Louisiana.
He predicted that by 2015 more than 25 percent of Canadian gas will come from unconventional plays, including tight sands, coalbed methane and gas shales and by 2017 60 percent of Canada’s conventional gas reserves will be produced out.
Ziff does not expect any easing in oilfield service costs until the spring thaw “when the bottom will fall out … we’ll see moderate costs decreases through spring break-up and then it’s a whole new world.”
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