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Vol. 11, No. 45 Week of November 05, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

It’s no longer a gas in Western Canada

Costs, productivity, prices suggest ‘cozy’ days disappearing, consultant says; warns gas-weighted producers ‘have no place to hide’

Gary Park

For Petroleum News

The natural gas world of Western Canada is one of ups and downs these days, but the end result is down.

Well productivity is down, well costs are up and commodity prices are down, all the elements to put the Western Canada Sedimentary basin on a collision course with itself.

Paul Ziff, chief executive officer of consulting firm Ziff Energy Group and one of the most trusted voices in the industry, said the trends cause him concern about the competitiveness of the basin.

Speaking to the Calgary Chamber of Commerce, he suggested the cozy days of Canada’s dominant producing region are vanishing along with the basin’s long reserve life, the cheap Canadian dollar and the “low or reasonable” costs that companies have come to accept.

Given that shallow gas targets are the most straightforward, simple type of drilling it is “staggering” that large companies are now faced with shallow drilling costs of C$125-C$300 per meter, he said.

That represents a tough message for gas-weighted producers, particularly income funds and trusts which have monthly payout obligations.

In Ziff’s view the “worst place to be is in one commodity. … When the price goes down there is no place to hide.”

However, he gave credit to those trusts that have moved to hedge their production volumes.

Cost inflation exceeds U.S. basins

Estimating that cost inflation in the WCSB exceeds that of any U.S. basin, he said drilling costs consume 60 to 70 percent of capital spending for most Canadian conventional gas producers, while finding and development costs have been on an upswing, climbing 30 percent in just the last year.

Even for sweet shallow gas wells in the WCSB, some fields have operating costs of C$2 per thousand cubic feet.

Once royalties are factored in gas “can’t be replaced for that,” he said.

In this bleak environment a number of Canadian companies have headed south, enticed by lower costs and the less developed state of some U.S. basins.

Another warning flag was waved by EnCana which said its third-quarter operating costs were up 22 percent year-over-year, about seven percentage points linked to a stronger Canadian dollar and 15 percentage points to the frenzied pace of field activity.

The more muscular Canadian dollar has taken a chunk out of profits for producers who sell gas in the U.S.

Ziff said new wells in the WCSB are producing an average 210,000 cubic feet per day, compared with 850,000 cubic feet about eight years ago — a decline that requires 16,000 new wells every year just to maintain production.

He also questioned the validity of the traditional Canadian yardstick of six-to-one that producers once used to convert gas volumes to barrels of oil equivalent.

That no longer bears any resemblance to market pricing, Ziff said, saying that in 2005 the gas-to-oil equivalency was one-to-seven and this year’s meltdown has made it one-to-ten.

He said the impact of these shifts occurs at the management level when companies assess the operating or finding and development costs among various gas fields.

Drillers scale back on drilling estimates

The thoughts expressed by Ziff seem to be spilling over on a wider front, with the Canadian Association of Oilwell Drilling Contractors scaling back its forecast well count for 2006 and predicting an even sharper drop in 2007, driven by lower gas prices.

The association, in releasing the industry’s first major forecasts, said it now expects 22,298 well completions in Western Canada this year, off by 3,700 from its original projection a year ago and down 1,529 from its revised numbers in June. For 2007, it is betting on a further drop to 19,023 wells.

Although it did not provide a breakdown of oil and gas wells, gas-targeted drilling has ranged from 60 to 75 percent of the total over recent years.

CAODC based its outlook on average prices of $65 per barrel for WTI oil and $6.50 per thousand cubic feet of Nymex gas, plus an average 7.1 days to complete a well in Western Canada.

It expects the 12-month rig utilization rate of 65 percent for 797 available rigs this year will slump to 51 percent for 833 rigs in 2007. The quarter by quarter forecast for 2007 is: January-March: 80 percent vs. 90 percent in the same period this year; April-June: 25 percent vs. 61 percent; July-September: 45 percent vs. 65 percent. October-December: 55 percent vs. 55 percent.

CAODC President Don Herring said this is the first cooling off in the region since 2002 and, if the association’s gas price forecast is accurate, there won’t be much industry interest in drilling shallow or low-deliverability wells, or coalbed methane wells.

National Energy Board sees deliverability edging up

One mildly encouraging message came from the National Energy Board in a new 2005-2008 forecast for Canadian gas deliverability, which it defines as the gas available after field processing.

For all of Canada, it expects the total will edge up to 17.3 billion cubic feet per day in 2008 from 17.1 billion in 2005, with coalbed methane volumes tripling and offsetting declines in conventional output.

But the federal regulator expects daily conventional gas production will slide over the same period to 15.9 billion cubic feet from 16.4 billion as coalbed methane climbs to 1 billion from 300 million.

The board said that although decline rates in the WCSB are little changed, gas deliverability from the shallower eastern side of the basin is expected to drop by 150 million cubic feet per day in each of the study’s three years, while the intermediate, central and northwestern regions will remain flat this year, then also decline by 150 million cubic feet.

Coalbed methane deliverability should grow by just over 200 million cubic feet per day in each of the three years, but that falls short of earlier expectations of 250 million to 300 million cubic feet.

The board expects the western edge of the WCSB will see deliverability from the Alberta Foothills and Foothills Front area rise by 150 million cubic feet per day or 3 percent this year then add 100 million cubic feet per day over the next two years.

Just to hold the line on WCSB production means 3.4 billion cubic feet per day of deliverability will have to be replaced annually from new wells, the board said.

For Atlantic Canada, “marketable” gas deliverability was rated at 400 million cubic feet per day entering 2006, expected to shrink this year, then rebound to 500 million cubic feet in 2007, including onshore New Brunswick production of 25 million cubic feet by February 2007, stabilizing at 40 million cubic feet by late 2008. There was no attempt to include Nova Scotia’s Deep Panuke field, which EnCana has moved into the regulatory process, but does not expect to bring on stream before 2010 at 300 million cubic feet per day.



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