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Vol. 15, No. 3 Week of January 17, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Canada’s upstream on upswing; ’09 drilling licenses down 47%

With Canadian government land sales slumping to a 17-year low and average natural gas prices at their lowest point in the past decade, it was no surprise that cash-squeezed producers slashed their drilling programs in 2009.

Provincial government regulators issued 12,721 new well licenses during the year, off 47 percent from 2008 in the sharpest change on record in Canada, the poorest showing since 1998 and a staggering 18,196 short of the 2005 record.

But there has been the faintest glimmer of hope over the past month, with an uptick in natural gas prices from a winter that is pounding most regions of North America, adding weight to the sustained US$80-per-barrel oil price.

For Western Canada, December was the strongest month for 2009, posting a total of 2,105 new licenses, while the last five months of the year spurred a revival of oil drilling interest in Alberta and Saskatchewan.

Gas prices up

Entering 2010, gas prices at the Alberta AECO trading hub have nudged C$5.75 per Gigajoule, about C$2 above last year’s average closing day spot prices and C$3 above the 1999 average.

That gave producers something to cheer about after they tallied their dismal returns from the 2009 average of C$4.35, down 32 percent from the final quarter of 2008.

While gas continued on its rollercoaster, a rally in oil prices, helped by a steadily recovering North American economy, gave that sector reason for hope.

Although the average price was down 36 percent from 2008’s record of more than C$100 per barrel, light, sweet crude at Edmonton averaged C$66.46 per barrel for all of 2009, within sight of the C$69-$77 prices posted in the 2005-07 period.

Lloydminster heavy crude prices averaged C$58.50 last year, a hefty setback from the previous year’s C$82.87, but the second best price in the past decade.

Heavy oil producers benefited from a continued narrowing of the gap between heavy and light oil, with Fort Hills Lloyd Blend averaging C$58.50, down 29 percent from 2008, while Imperial Bow River yielded C$60.14, a drop of 28.9 percent from 2008.

The differential between Flint Hills blend and the average Canadian price declined to C$7.90 per barrel from C$20.56 in 2008.

Gas wells down

Against this mixed and uncertain backdrop, Canadian operators found more comfort in oil than gas as they sought regulatory approval for new wells.

Alberta, British Columbia and Saskatchewan approved 5,507 gas permits (including coalbed methane) last year, compared with 12,082 in 2008 and the benchmark 21,503 in 2005.

Gas was the major drag, with operators licensing only 661 new gas wells in December, down from 1,095 a year earlier, but Alberta issued 468 new oil permits during the month (283 conventional and 185 bitumen), the most for December since 2000. East-central Alberta, the focal point of the sizzling Cardium play, posted 522 new oil well permits in the final quarter, up 9 percent from the same period of 2008.

The hardest hit regions in 2009 were southeastern Albert’s shallow gas plays, with only 2,652 permits issued, down 2,424 from 2008, and southwestern Saskatchewan’s shallow gas plays, where new licenses plunged to 537 from 2,113 in 2008.

In Alberta, the Energy Resources Conservation Board approved 1,041 new coalbed methane permits, barely half the 2008 total of 2,031 and about one-third of the record 3,106 in 2005.

The cancellation or postponement of many oil sands programs hammered that sector, which obtained only 1,674 approvals for evaluation wells, compared with 3,567 in 2008 and 5,132 in 2007.

EnCana leading operator

Leading the operators were EnCana, with 2,210 licenses, and Canadian Natural Resources, 1,180, compared with 3,445 and 1,508, respectively, in 2008. Next in line were Husky Energy 575, Enerplus Resources Fund 498 and Suncor Energy 397.

The trade publication Rig Locator reported that 598 of the available 798 rigs were at work in Western Canada in the first week of January, a level not seen since 2008.

Chad Friess, an analyst with UBS Securities, said the performance is better than last year and a spokeswoman for the Canadian Association of Oilwell Drilling Contractors said there is evidence of a “little more stability” than a year ago.

Friess forecasts the active rig count will ease by late February, but less dramatically than last year because there are a lot better balance sheets out there. Companies are able to continue spending, whereas last year the winter budgets had been set even before the financial crunch gripped.

He is counting on 3,100 wells during the first quarter, with an average 351 rigs working, compared with 311 a year earlier.

In the United States, observers are concerned that expanding activity levels will deliver more gas to an already saturated market and could deflate commodity prices that have just started to regain solid ground.

Macquarie Capital analyst Waqar Syed said the next two months will be critical for the gas sector, based on how much gas is drawn out of storage, where the surplus is currently estimated at 11 percent.

—Gary Park

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