Little upside seen for Canadian oil producers; natural gas outlook not as grim

Gary Park

PNA Canadian Correspondent

Like its counterparts worldwide, the Canadian petroleum industry is headed in only one direction — downward.

The litany of woes seems endless:

• Capital spending fell 18.5 percent in 1998 to C$7.57 billion, the largest single-year decline since 1986, and is predicted to drop by 3.6 percent across a wide front in 1999.

• Purchases of government-owned oil, gas and oil sands leases slumped by about 50 percent last year to C$748 million, the lowest level in five years, while the total land sold (the clearest barometer of exploration intentions) fell to 9.64 million acres from 17 million acres in 1997.

• More than 45 percent of oil and gas producers lost money in the first three quarters, with overall net income crashing to C$399 million from C$2.9 billion in 1997. For independents, those numbers were aggravated by the solid showing of Canada’s four integrated companies — Imperial Oil Ltd., Shell Canada Ltd., Petro-Canada and Suncor Inc. — which actually posted combined profits for the nine months of C$955 million.

• Cash flow was off across the producer sector in 1998 by 20 percent and the utilization rate for 420 rigs ended the year at 51 percent compared with 84 percent a year earlier.

• Asset writedowns for the year were expected to exceed the old 1992 record of C$2.4 billion.

Cycle of takeovers to continue

John Shiry, president of Calgary-based Woodside Research Ltd., said that of the top 100 publicly traded Canadian companies in 1988 only 20 are still in business today.

“Over the coming year, I expect to see many more companies disappear,” he said, noting that debt-to-cash flow ratios are at levels above the normal safety range and banks are applying a “crunch” to lines of credit.

The gloom is also threatening to erode confidence in the booming East Coast frontier, where ambitious ventures such as the Terra Nova, Whiterose and Hebron fields are being eased off the fast track. Newfoundland Energy Minister Roger Grimes said that although low oil prices have created uncertainty for the East Coast “this is still going to be a major, multi-faceted oil region.”

Company officials, while reluctant to go public, are less cheerful. They suggest delays of up to two years are likely.

Rick Roberge, an analyst with Pricewaterhouse Coopers, said the “whole economics and excitement of the Newfoundland projects are waning a bit.”

A test of the East Coast’s near-term prospects occurs early this year, with a call for bids covering 5.44 million acres in the Sable Island area offshore Nova Scotia. The call was issued by the Canada-Nova Scotia Offshore Petroleum Board in response to industry pressure early in 1998, before the depth of the oil price slump was apparent.

Now the April 29 deadline is viewed as measure of how eager major companies such as Mobil Oil Canada Ltd., Chevron Canada Resources Ltd., PanCanadian Petroleum Ltd., Petro-Canada and Shell Canada are to gamble on the region’s eventual prospects.

Sable is already the site of Canada’s first commercial offshore oil field and will become the first commercial offshore gas producer in early 2000 when the Sable Offshore Energy Project taps into a 3 trillion cubic foot field for markets in Atlantic Canada and New England.

While optimism is a scarce commodity, leading analysts such as the Ziff Energy Group of Calgary are confident an extra 1.1 billion cubic feet per day of natural gas pipeline capacity to the United States, plus a further 2 billion cubic feet per day by late 2000, will eventually pay. That new space will enable Canadian producers to “meet the market where it’s been artificially constrained in the past” and make Canadian prices more reflective of U.S. prices, said Ziff vice-president Richard DeWolf. He said the overall gas market remains fundamentally solid and dismissed speculative trading, based primarily on weather assumptions, as not an accurate guide to value.