Two-month blip an illusion Canadian well completions edge ahead of 2006 numbers in October, November, but oil and gas discoveries lag, pointing to grim 2008 Gary Park For Petroleum News
Even the shreds of hope are worth clinging to in Canada these days despite what is widely expected to be the choppiest year in recent memory for the Alberta industry in 2008.
Given that, there was the faintest hint of encouragement towards the end of 2007 as Canadian operators exceeded 2006 well completions in October and November (the December numbers won’t be available until late January).
They drilled 1,797 wells in November (39 better than a year earlier) after tallying 1,956 in October (up 38). Even Alberta and British Columbia edged ahead of the November 2006 count.
To the end of November, 17,038 wells were drilled, off 20.4 percent from the 11-month count in 2006 of 21,417 and the record year of 2005 when rigs were released on 22,455 wells.
Wells started in November also climbed marginally to 1,834 from 1,792 in November 2006, but the 11-month total was 17,032, off 20 percent.
Final count will fall short The reality is — given the total of 18,033 at the end of November — that the final count for 2007 is bound to fall short of 20,000 for the first time in five years, while exploratory drilling will be the lowest since 1999.
For the January-November period, Alberta dropped 20 percent to 12,746 wells and British Columbia was off 37 percent at 798 wells, while Saskatchewan declined 11 percent to 3,143 wells.
Exploratory wells tallied 3,218, down 41 percent and plunging towards the most recent low point of 2,985 wells in 1999.
Oil development completions were 4,212, the most in seven years, but the 9,546 gas development completions hit their lowest ebb since 2003.
Oil discoveries were 718, 94 behind the 11-month count in 2006, but the second highest in nine years, largely driven by the high price of oil and activity in Saskatchewan’s Bakken play.
Gas well discoveries were reported at 2,376, a precipitous decline of 1,237 from the previous year.
Gas production down The result of the overall slowdown is reflected in numbers compiled by FirstEnergy Capital, which said November gas production of 16.16 billion cubic feet per day in Western Canada is down 270 million cubic feet per day from a year earlier.
And FirstEnergy warns the outlook is even worse, with gas supply reductions increasing to 2 bcf per day over the next two years as gas supplies head for the “proverbial cliff” unless prices rebound before late 2008.
The grimmest statistics of all these days cover rig utilization, which fell to 40-45 percent from mid-October to November 2007, from 54-58 percent in the same period of 2006 and a staggering 84-90 percent in 2005.
Alan Laws, an oilfield services analyst with Merrill Lynch, told the Financial Post there is not the demand to “create the normal post-Christmas snap back of activity. It’s going to be a pretty harsh winter (the peak drilling season in Canada).”
Regardless of an 18-month slump in gas prices, persistently high drilling and service costs and industry unhappiness over Alberta’s planned royalty hikes, it’s not as if the leading E&P companies are short of the financial means to revive their capital programs at short notice.
Cash flows high Ignoring the wall of cash that washed over the industry from the convergence of high oil and gas prices in 2005, surveys of almost 170 producers put the third quarter of 2007 in rare league. Cash flow edged over C$14 billion, roughly matching the previous quarter and the same quarter of 2006, and profits of C$17.3 billion, although trailing the 2006 record, were the second highest since the turn of the century.
Even capital spending at C$17.2 billion beat the comparable quarter in 2006 of C16.23 billion.
And, despite the collective industry spurning of Alberta, land sales racked up the third highest total on record.
But the dip in rig utilization in the fourth quarter to 34 percent — the worst since the prolonged industry swoon from 1986 to 1992 — is seen as setting the stage for a drive to 14,500 wells or less in 2008, about 10,000 wells short of the 2005 benchmark year.
Roger Soucy, president of the Petroleum Services Association of Canada, said that although some rigs are destined for the United States or overseas, many will simply be decommissioned or sit idle.
For some, consolidation may be the only means of survival as they follow the pre-Christmas merger of Peak Energy Services Trust and Wellco Energy Services Trust.
Peak Chairman and Chief Executive Officer Chris Haslam said “we’re now in the 18th month of this current down-cycle” and because of royalty changes and cap-ex cutbacks “there will be a significant reduction of drilling in Alberta.
“Opportunities do present themselves in down markets and we want to be very nimble in terms of being able to react to that,” he said.
Haslam estimates the merger can generate combined initial savings of C$5.5 million a year through reduced administrative and operating costs and even more once integration begins.
For the first nine months of 2007 Peak reported a net loss of C$8.72 million, compared with a C$19.13 million profit in the same period of 2006, and Wellco tumbled from a comparable profit of C$13.48 million to a net loss of C$1.58 million.
M&As could grow Mergers and acquisitions could take place on a much wider scale, spurred by low gas prices, royalty trust consolidation and foreign interest in the oil sands, which could push the dollar value to its highest point since 2001, says Alan Tambosso, president of Sayer Energy Advisors.
Some analysts say there is little future for companies producing less than 10,000 barrels of oil equivalent per day, which means tough times for the host of small gas-weighted companies who are being shut out of the equity markets and are reportedly on the prowl for buyers or merger partners.
Tambosso is counting on more corporate rather than asset deals, especially by juniors who feel they are getting a raw deal from the marketplace.
That wave could easily turn into a tsunami for the bigger players, unless they can successfully shift their powerbases from Alberta to Saskatchewan, British Columbia, the United States or overseas.
There are estimates that the market value of companies with 95 percent of their production in Alberta — mostly juniors, which rely on dwindling light oil and shallow gas plays — has been slashed by 25 percent.
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