Grim Canadian upstream outlook worsens

Layoffs hit 25% in energy service companies since end of ’08; well completion forecast at lowest since 1998 when oil hit US$10

Gary Park

For Petroleum News

With producer cash flows evaporating, the bad news is coming in tidal waves for Canada’s upstream.

About 25 percent of energy service company employees have been laid off since the end of 2008, prompting the Petroleum Services Association of Canada to lower its 2009 well completion forecast for the third time to 10,000, down 41 percent from last year’s tally of 16,940 and the lowest level since the 9,744 completions in 1998 when oil dipped to US$10 per barrel.

It now forecasts companies will spend C$8 billion this year on drilling and completions, continuing the stomach-churning descent over the past four years from C$23 billion in 2006 to C$16 billion in 2007 and C$14 billion in 2008.

PSAC President Roger Soucy said his sector has probably lost 12,000 to 15,000 workers since late last fall — people who are “not going to be called back, not any time soon.”

“In our business, if you lay people off and they’re gone for three or four months or longer, your chance of getting them back is pretty slim,” he said. “We haven’t seen the last of it yet.

“This loss of intellectual capital is going to make it very difficult for industry to ramp back up when activity does recover.”

Factoring in another 9,000 drilling rig workers who have received a pink slip just since February (based on estimates from the Canadian Association of Oilwell Drilling Contractors), about 25,000 people who were once working in the Canadian oil patch are now hunting for jobs elsewhere.

The Alberta government’s latest budget calculates the province alone will lose 15,000 jobs overall this year due to the economic slump.

Soucy said a PSAC survey conducted in mid-April got a response from 23 percent of PSAC members indicating they lost an average 22 percent of their workforce since December.

Biggest hit in Alberta

Alberta will take the biggest hit, with PSAC predicting 6,620 wells this year, off 43 percent from last year’s 11,720.

Saskatchewan is expected to drop 38 percent to 2,475 and British Columbia faces an 18 percent decline to 700.

Andrew Bradford, an analyst with Raymond James, said most of the problems stem from a natural gas glut, especially in the key U.S. consumer market.

He said gas production is “doing what it should do in a downturn. … Unfortunately, it’s been in a downturn for about two and a half years.”

Bradford said a turnaround in supply will not occur in time to salvage the 2009 gas market.

The drilling downturn will “yield production that starts falling off pretty quickly in the next few months. That’s the good news,” he said. “However, production will be higher year-over-year until June or maybe even July, so we have to accommodate that.”

Bradford said it will require production to wane and U.S. storage to level off before the industry can start looking for better times.

Ziff Energy Group forecasts that gas production in Western Canada will slide under 14 billion cubic feet per day by 2020, despite strong gains in the shale gas region of British Columbia, noting that 2 billion cubic feet per day of new gas is needed annually to stop that decline.

Soucy said that, aside from the economic crisis and low price environment, Alberta producers urgently need a reversal of the province’s higher royalties, based on “proper economic considerations as opposed to political objectives.”

“The province must position itself in the best possible way to take advantage of an economic turnaround when it presents itself,” he said.

Many fewer gas wells

PSAC is basing its new estimates on crude oil prices of US$50 per barrel for West Texas Intermediate and natural gas prices of C$4.10 per thousand cubic feet at the AECO hub.

Raymond James is calling for gas to average US$3.75 per thousand cubic feet on the New York Mercantile Exchange, rebounding to US$10 in 2010 and WTI to average US$43 this year and US$65 in 2010.

The firm expects Canadian well completions will be close to 11,000 this year, rebounding to 19,700 in 2010, with rig utilization averages rising from 30 percent to 45 percent.

FirstEnergy Capital doubts problems will ease in coming months, setting price targets of US$55 per barrel for WTI, US$4.50 for Nymex gas and C$4.17 for AECO gas. It is targeting 11,400 well completions.

FirstEnergy analyst Kevin Lo said the first quarter will be the prelude to the balance of 2009 after a rapid deterioration in business by March in all North American basins.

He said that as the drilling pullback affects storage levels in Canada and the U.S., a bounce back is in the cards for 2010 when prices should average US$7.75 per gigajoule for Nymex gas, C$8.060 for AECO and US$75 per barrel for WTI.

For 2009, FirstEnergy estimates U.S. gas production will drop 300 million cubic feet per day and Canadian output will slump by 800 million cubic feet per day.