Roller-coaster ride for Canadian gas

Ziff Energy suggests producers shut in wells rather than continue storage injections; lower service costs yet to bolster activities

Gary Park

For Petroleum News

From the staggering heights of two winters ago, the Canadian natural gas industry has descended into one of the most stomach-churning periods in its history.

As quickly as a glimmer of hope surfaces — service costs are down 10-20 percent from a year ago, while heat waves and the prospect of a punishing hurricane season point to a surge in demand for Western Canadian gas — the sector gets knocked for a loop.

Things are so grim that Ziff Energy Group, a leading gas consultant, suggested North American producers should shut in wells rather than bolstering gas in storage once it reaches 3.3 trillion to 3.5 trillion cubic feet.

A Ziff study, based on its estimate of total storage capacity of 4 tcf, found that average annual injections run to 2.2 tcf and withdrawals are about 2.4 tcf.

An analysis of storage numbers since 1998 showed storage inventories at the end of the withdrawal season have ranged from 700 billion cubic feet to 1.19 tcf for an average 1.3 tcf, which means surpluses for even normal winters.

Ziff said increasing storage capacity would only aggravate the problems, although it said there is a need for greater capacity so that producers have somewhere to place the gas they produce over the summer.

20 percent of gas lacks destination once injections wind down

The United States Energy Information Administration has forecast liquefied natural gas imports to the United States will rise 44 percent this year to 840 billion cubic feet and Ziff believes that number will climb to 10 bcf by 2010 and 15 bcf by 2015, with deliveries from Nigeria, Norway and Yemen to the Gulf Coast costing about US$4 per thousand cubic feet, indicating those controlling supply can absorb low prices in that range.

But the impact of growing LNG imports is not necessarily seen as a negative for Canadian gas, which faces a production decline in 2008 that the Conference Board of Canada expects will last for a number of years.

For now, the Canadian industry is being pulled in several directions, with even the positives failing to generate a widespread turnaround.

The heaviest blows are being absorbed in northeastern British Columbia and Alberta, where drilling costs have been trimmed 5-10 percent without any measurable impact on the upside.

Well completions have slipped 10 percent overall from 2006, with gas wells tallying 7,400 over the first seven months, the lowest count in four years.

Regulators across Canada have issued 12,596 well permits for the January-July period, off 27 percent from last year’s record 17,386 and a five-year low.

The brunt has been taken in the gas sector, with licenses to drill for conventional gas and coalbed methane in Alberta, British Columbia and Saskatchewan tumbling to 6,645, off 40 percent from last year.

Alberta conventional gas well approvals fell 42 percent to 4,567, while CBM licenses dropped 38 percent to 861; British Columbia took a 31 percent nosedive to 522; and Saskatchewan slipped 26 percent to 686.

Penn West Energy predicts gas drilling comeback this winter

• FirstEnergy Capital is reporting that Western Canada storage facilities are close to 90 percent full, three months ahead of last year’s rate of injections, with negative implications for spot prices. The research note said Canadian spot prices could slide under last year’s low of C$3.45 per gigajoule.

• Compton Petroleum is sticking with its plans for an aggressive second half, targeting 350 gas wells, up 20 percent from its original capital budget, despite taking a buffeting in the first half. But it has lowered its production guidance to 31,000-32,000 barrels of oil equivalent, down 6,000 boe per day. “We are very confident in the future of natural gas,” said Chief Executive Officer Ernie Sapieha. Compton believes its ramped-up drilling program will benefit from lower costs and better access to services and equipment.

• Chief Executive Officer Bill Andrew of Penn West Energy Trust, North America’s largest conventional oil and gas trust, predicted gas will stage a comeback this winter as service costs drop, gas prices rise and producers adopt a more realistic stance in their price forecasts. He said the fact that U.S. drilling last winter was “very active” while Canada had virtually no drilling reflected the cost of services in Canada. Andrew said it is now possible to “make the numbers work again” with gas prices at C$6-$7 per thousand cubic feet.

• High Arctic Energy Services, with its Canadian rig utilization rates at 23 percent, reported a 43 percent drop in domestic revenues, while its international revenue soared 75 percent. Chief Executive Officer John Wood said the company is “very excited about the growth opportunities in the international market,” but plans to retool its operations in conjunction with the current Canadian downturn.

• Total Energy Services Trust reported only 2 percent utilization for its contract drilling division in the second quarter, logging just 22 operating days for a fleet of 12 rigs. President Daniel Halyk said the trust’s business slumped around mid-June, but Total does not want to lead the way in price cutting and has rejected some projects where it has had concerns about getting paid. “We just won’t take work for the sake of getting work,” he said. Halyk said the last thing the trust wants to do is impose wage rollbacks.

• Pure Energy Services reported a 57 percent decline in overall job counts in the second quarter, forcing the company to scale back its forecast 2007 revenue by 23 percent to C$133 million, reflecting its Canadian performance. In contrast, its United States operations posted a 90 percent revenue hike in the second quarter from a year earlier.