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Plunging commodity prices spillover to Canada’s exploration & production budgets Some majors stick with plans, but analysts brace for cutbacks in drilling programs and warn of consequences from a slump in gas exploration Gary Park PNA Canadian Correspondent
With oil and natural gas prices being whipsawed, amid fears that a global recession has been accelerated by terrorist attacks on the United States, Canada’s E&P sector is bracing for heavy cuts to capital spending and drastically revised earnings forecasts.
Budgets and drilling plans are already being scaled back for the balance of 2001 and all of next year.
“We are in new times here,” said Scott Dutton, chief executive officer of Upton Resources Inc. “I don’t think anyone truly understands the ramifications.”
“People are starting to wake up to the fact that the events of September 11 are going to have a major impact on world economies,” said Peter Linder, an analyst with Research Capital Corp. in Calgary. Nothing changes at AEC But not all E&P companies are yet prepared to abandon their search for new gas.
A spokesman for Alberta Energy Company Ltd. said nothing has changed with the company’s capital or drilling programs this year, adding “you can’t have capital programs of this magnitude and turn them on and off. You don’t plan built on the extreme swings and the volatility of the market.”
For Shell Canada Ltd., a spokeswoman said the decline in gas prices will have less short-term impact on her company than on smaller firms. “Our plans are quite a bit more long-term (and) our price premises have always been pretty conservative,” she said. Petro-Canada boosted its capital spending in Western Canada by C$120 million to C$500 million this year, reflecting its “long-term view that the market condition for natural gas remains strong.”
The general mood, however, is one of deepening gloom, which some analysts fear will have unpleasant consequences when the economy rebounds, especially if new gas supplies start lagging far behind demand at a time when Canada is expected to meet 70 percent of North America’s growth demand over the next eight years. Drilling down 30 percent The Canadian Association of Oilwell Drilling Contractors, representing the 30 largest companies in the sector, said it now expects second half drilling will be down 30 percent from its original forecast in April and 17 percent lower for the whole year.
The association is projecting 17,300 well completions for 2001, compared to 19,455 in its previous estimate, while the utilization rate for Canada’s 638 rigs will drop to 64 percent for the year from a predicted 76 percent.
“Largely, the revisions reflect the lower natural gas price,” said CAODC president Don Herring. “Our operators seem to be pulling in their horns.”
However, even if the revised target of 17,300 wells is accurate, CAODC said the finally tally would still be about 800 wells ahead of last year’s record.
But the impact is likely to be severe in the gas sector, which now accounts for about 62 percent of all drilling and, according to most analysts, needs to complete about 10,000 wells a year just to maintain current levels of supply let alone meet projections by the U.S. Energy Information Administration of a 6 percent raise in Canadian imports this year and 10 percent in 2002. Cuts will lead to higher gas prices The outlook is even grimmer according to a new survey by FirstEnergy Capital Corp. of 40 leading Canadian producers, who expect capital spending earmarked to find new gas reserves of between 25 percent and 40 percent next year.
Martin Molyneaux, institutional research director at the Calgary-based investment firm, said the cuts will lead to tighter supplies and inevitably to higher prices.
But he noted the E&P companies have “only so much cash flow they can allocate to generate returns on capital and at the moment they are not looking at gas.”
Although gas in storage for the winter heating season is about 17 percent ahead of last year’s inventories, both Canada and the United States are grappling with rapid declines in gas reserves that need to be replenished, he said.
Keith Macdonald, chairman of the Small Explorers and Producers Association of Canada, said reduced cash flows will inevitably slow some spending, especially among the gas-weighted producers.
He said that among small producers projected cash flows are being cut back 30 percent to 40 percent “so I think there is going to be a little less activity until such time as we see natural gas prices creep back up again.” Oil budgets flat On the oil front, Molyneaux said there is some optimism that finding and development budgets will be flat in 2002, although the latest weakening in prices could alter that planning.
A study by Lehman Brothers Holdings Inc. said higher storage rates, lower demand and higher output could result in a prolonged weakness in gas prices.
In the support sector, the stocks of roughneck companies are getting a rough ride and Miles Lich, an analyst with Peters & Co., has reduced 2002 earnings forecasts by 34 percent for drilling contractors and 39 percent for drilling services companies, based on falling commodity prices translate in shrinking capital budgets.
He said the Toronto Stock Exchange’s oil and gas sub index has lost 7 percent this year, while the TSE oil and gas services sub index has been in a freefall, losing 37 percent.
Steve Savidant, president and chief executive officer of Canadian Hunter Exploration Ltd. said he is confident long-term gas prices could still hover in the range of US$3-$4 per thousand cubic feet compared with the $2 range through the 1990s.
He said that companies which were able to make a profit with finding and development costs of 80 cents (Canadian) per thousand cubic feet when gas was selling for US$2 can do the same at C$1.50 for finding and development costs if gas is selling at US$3-$4.
“This is the beginning of a new age of exploration in the Western Canadian basin, characterized by higher energy prices and far more challenging geology,” Savidant said of the longer term.
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