|
Western Canada falling out of favor
Gary Park Petroleum News Calgary correspondent
Less and less are the big E&P companies who dominate the Western Canada Sedimentary Basin hiding their disenchantment with Canada’s leading hydrocarbon source. EnCana and Petro-Canada have candidly declared their intention to pull back from conventional oil and natural gas plays in the basin as they come to terms with the rising costs of replacing production.
Randy Eresman, chief operating officer of EnCana, told a third-quarter conference call that Canada’s pacesetting independent is shifting its activities to more focused resource plays, while continuing to look for big finds in the frontiers and internationally.
For Western Canada, EnCana will “contain our conventional exploration activity, which is generally accepted to be chasing smaller and smaller pools, away from having to acquire new lands and being in that highly competitive arena and focusing on our existing land base,” which is dominated by southern Alberta and British Columbia’s Greater Sierra and Cutbank Ridge prospects, Eresman said.
Equally blunt, Petro-Canada has said it will not boost spending in Western Canada in a bid to reverse declining production because costs in the region are too high.
Chief Executive Officer Ron Brenneman reinforced that strategy in his third-quarter assessment by listing liquefied natural gas as a part of Petro-Canada’s growth objectives, along with Venezuela heavy oil and low-cost Middle East oil. Finding and development costs up 20-30 percent Christopher Theal, an analyst with Tristone Capital in Calgary, is among analysts drawing attention to the finding and development costs in Western Canada, which have grown by 20-30 percent over the last three years, putting the basin at a disadvantage against other global opportunities.
A new study by BMO Nesbitt Burns analyst Matthew Janisch warned that the onerous costs of replacing oil and gas production in Canada are putting operators at considerable downside risk if commodity prices start to slide.
In a note to clients, he said the sector, rather than just hoping for higher commodity prices to offset higher F&D and unit operating costs and weakening operating efficiencies, now requires higher commodity prices “to sustain even minimum returns.”
Janisch said the weaker operating efficiencies mean greater capital “will be required to meet production guidance than is currently being forecast, well in excess of the cash flow for many producers.”
A minor dip in commodity prices could trigger a “rapid deterioration of balance sheets, a failure to meet production guidance, or both,” the analyst warned.
Compounding the outlook is the expectation of record drilling this winter that has intensified competition for land, labor and equipment.
Janisch studied 14 leading North American E&P companies to calculate operating efficiencies — or the cost of replacing each barrel of production.
For Canadian-based producers that cost averaged C$24,000 per barrel of oil equivalent last year, compared with C$18,555 for U.S. independents.
At the low end of the Canadian list were Canadian Natural Resources and Penn West Petroleum, averaging close to C$20,500 each, while EnCana and Talisman Energy were in the C$26,000-$27,000 range.
In EnCana’s favor, however, is one of the industry’s lowest decline rates which Eresman estimated at less than 15 percent, compared with the industry standard of about 25 percent, giving the company “more discriminatory cash flow for investment.”
Of the U.S. producers, Janisch said Devon Energy, Burlington Resources and Pogo Producing replaced production at the lower end of the cost scale, finishing ahead of Anadarko Petroleum, EOG Resources and Forest Oil.
| 