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Looming North American gas crunch sets stage for drilling recovery Prices heading upward; Canada expects hike in oil and gas drilling of up to 22 percent in 2003 as operators put more cash flow into ground Gary Park PNA Canadian Correspondent
With the growth in North America’s natural gas demand outpacing supply and the major gas basins in decline, there are the first signals that this year’s slowdown in capital spending of about 30 percent is coming to an end.
Even with relatively normal winter temperatures, the Natural Gas Supply Association said at the start of fall that U.S. demand will increase and wellhead prices will follow an upward trend, provided an impending economic recovery spurs consumption, especially in the industrial sector which accounts for 40 percent of all gas delivered to consumers.
Although there is a wide divergence among forecasters on the price outlook since gas slumped to a multi-year low in July, there is agreement that drilling in the United States and Canada has lagged so far behind 2001 it is just a matter of time before the market tightens.
The U.S. Energy Information Administration has predicted an average winter price of US$3.20 per thousand cubic feet, compared with the 2001-02 season when bearish fundamentals kept prices below $3.
Others, such as Calgary-based investment dealer FirstEnergy Capital Corp., believe the output decline across North America has set the stage for increases in the range of 30 to 50 percent, regardless of current record storage levels.
Sharp rebound possible in exploration Although most producers are still in the early stages of their 2003 budgeting process, some are sending out strong hints of a sharp rebound in exploration activities.
The leading industry associations and analysts in Canada issued forecasts Oct. 30 ranging from a 10 percent to 22 percent increase in oil and gas well completions for 2003, reversing this year’s 33 percent slump in capital spending.
The Petroleum Services Association of Canada predicts a 10 percent increase to 16,500 wells rig released; the Canadian Association of Petroleum Producers expects 16,500 to 17,000 completions; and the Canadian Association of Oilwell Drilling Contractors is counting on a 22 percent jump to 17,532 wells. All of the forecasters assume gas wells will account for about 60 percent of the totals.
FirstEnergy Capital set the most bullish target yet among analysts, suggesting that gas-driven drilling could push next year’s tally to a record 18,100 wells, with gas completions 31 percent ahead of this year’s levels at 10,800 wells.
Capital spending expected to grow FirstEnergy also expects producers to hike overall capital spending by 23 percent to C$27.2 billion (US$17.5 billion).
The Canadian Association of Petroleum Producers, whose member companies produce 97 percent of Canada’s oil and gas, said capital spending will grow by C$1.5 billion (US$967 million) to C$24.5 billion (US$158 billion).
The Canadian Association of Petroleum Producers calls for an average 390 rigs from an available Canadian fleet of 663 rigs to operate through 2003 for a utilization rate of 53 percent, up from this year’s anticipated 50 percent.
On the gas side, the association has based its forecast on an average AECO price of C$4.40 (US$2.84) per thousand cubic feet, which president Don Herring described as “probably on the low side.”
But the overall gas outlook is upbeat “driven off high commodity prices and the fact that deliverability has been tested a bit. Our understanding is drilling activity hasn’t kept pace with production, so there are some deliverability issues. We are assuming that there is a push to get deliverability back in place,” he said.
The Petroleum Services Association of Canada, basing its calculations on an AECO price of C$4.75 (US$3.06) per thousand cubic feet, expects a 25 percent increase in drilling in Canada’s emerging new plays, notably northeast British Columbia and the Foothills front that stretches from the U.S.-Canada border to east-central British Columbia.
Northern regions may see exploration Without disclosing the details of their 2003 programs, several Canadian-based E&P firms have indicated their latest quarterly reports that they plan to supplement conventional supplies by exploring options in the geologically challenging northern regions.
Husky Energy Inc. said its 2002-03 exploration program will target gas prospects in northeast British Columbia, the Foothills along the eastern slopes of the Canadian Rockies and the deep basin portion of Western Canada.
Talisman Energy Inc., whose Canadian production averages about 800 million cubic feet per day, is actively working with its partners to develop plans to follow up the first commercial development of the deeper, underexplored reservoirs of the Monkman area in the British Columbia Foothills.
Since unlocking a regional play earlier this year that it believes holds in excess of 1 trillion cubic feet of unrisked, recoverable gas, Talisman said more than 30 potential locations have been mapped, each with an estimated 20 billion to 40 billion cubic feet of recoverable gas.
Nexen, which currently relies of shallow Alberta and Saskatchewan plays for 80 percent of its domestic output, , said its focus of shifting to northeast British Columbia and the Alberta Foothills, where a number of plays have been identified and programs are being developed.
Not all forecasts upbeat But not all forecasters are upbeat about Canadian prospects. Miles Lich, with Calgary-based investment dealer Peters & Co., told a Petroleum Services Association of Canada panel Oct. 30 that there is a drain on capital as Canadian-based companies expand their international operations and the fast-growing ranks of royalty trusts distribute 90 percent of free cash flow to unit holders rather than putting that money “into the ground.”
However, he said those trends are being partly offset by the U.S.-based companies which have established Canadian operations in the past three years and are increasing spending on their Canadian gas properties.
The challenge facing all of North America to develop new supplies is highlighted in a report by Canada’s National Energy Board on “Canadian Natural Gas Market Dynamics and Pricing: An Update” released Oct. 17.
Despite a 25 percent increase in well completions during the record year in 2001, the regulator said Canadian gas production rose by only 1.7 percent to about 17.5 billion cubic feet per day, of which about 60 percent is exported to the United States, accounting for 16 percent of U.S. demand.
Board cites mature basin The National Energy Board said the maturity of the Western Canada Sedimentary Basin — which accounts for 93 percent of Canada’s total production — is evident in the shrinking size of discoveries, reduced well productivity and shorter production life. More than 25 percent of current production is gathered from wells drilled in the last two years, the board noted, adding that existing production is declining at a rate of 3 billion cubic feet per day, or 20 percent, annually.
To increase supply from the Western Canada Sedimentary Basin, producers have boosted capital spending from C$3 billion (US$1.9 billion) in 1993 to C$10 billion (US$6.45 billion) in 2001.
While producers will be challenged to dramatically change basin supply trends, the energy board said it was confident large pools may still be discovered matching those of British Columbia’s Ladyfern field and this year’s finds in British Columbia’s Greater Sierra region by EnCana Corp. and the Monkman area by Talisman Energy.
Both Canada’s energy board and the U.S. Natural Gas Supply Association emphasize that alternative sources of gas and new areas of development must be pursued to prevent critical shortages over the long term.
East Coast options The National Energy Board said the Canadian industry is examining options to expand East Coast offshore production, the construction of pipelines from Northern Canada and the development of coalbed methane.
U.S. Natural Gas Supply Association Chairman Bill Transier said imported liquefied natural gas will lift U.S. supply by about 180 billion cubic feet this winter, an increase of about 200 percent over 2001.
But tighter controls on developing coalbed methane and drilling in the eastern Gulf of Mexico have prompted the association to lower its supply outlook to “adequate” from “ample,” he said.
“Access to supply is more crucial than ever for two fundamental reasons: demand is increasing and production is decreasing,” Transier said, warning that the impact on consumers could be both higher prices and greater price swings.
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