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Hunting for upstream answers Rampant activity has operators casting a wide net to cut costs, find rigs and roughnecks; China becomes part of solution; EnCana looks to long-term contracts for 50 percent of fleet Gary Park Petroleum News Canadian Correspondent
The crunch is so severe in North America that stories have surfaced of E&P companies turning to China to obtain rigs and roughnecks to offset soaring costs, handle a blistering upstream pace and meet production demands.
Things hit a peak in July when EnCana, North America’s leading natural gas operator, told analysts it was prepared to enlist Chinese help to develop its 4.6 trillion cubic feet of unbooked gas reserves in Colorado’s Piceance basin.
That program alone involves projections of drilling 3,700 wells over the long haul at $1.6 million per well.
During a tour of the region, EnCana indicated to analysts that importing workers from China would significantly lower costs at a time when the economics of drilling in Colorado has propelled rig rates to $14,000 per day from $8,500 a year ago.
At the same time, Denver-based Western Energy Advisors, citing a lack of skilled labor in Colorado, said it was talking with U.S. and Canadian companies — including EnCana —about contracting for crews and equipment from China.
This comes in the thick of mounting talk among U.S. legislators about taking action to prevent a takeover of Unocal by China National Offshore Oil Corp. given the threat to U.S. national energy security and so long as the Beijing government prevents foreign takeovers of its state-owned oil companies.
The steam was quickly taken out of the Chinese option for EnCana, when the big Canadian independent said in mid-July that it had taken only a preliminary look at the idea before opting to rely on its traditional sources. Chinese rigs and demonstration crews coming However, a spokesman for Western Energy (owned by three companies including a subsidiary of China National Petroleum) said it still intends to deliver two Chinese rigs and demonstration crews to the United States to work for two private producers in the Piceance by September.
The political response from Washington is still taking shape.
U.S. Energy Secretary Samuel Bodman, in reacting to the prospect of EnCana doing deals with the Chinese, said: “This is a matter of free enterprise,” adding he was sure EnCana would observe the laws of the United States.
Rep. Duncan Hunter, a California Republican and chairman of the House Armed Services Committee, without commenting directly on the prospect of Chinese manpower and machinery being imported, called for legislation to block a CNOOC takeover because of the harm it would do to U.S. national security.
Rep. John Salazar, a Democrat whose district covers some of Colorado’s largest gas fields, said he was “totally against the Chinese government running the jobs in our country.” EnCana a key barometer The Chinese kerfuffle aside, the industry’s upstream cost pressures are a major factor in forcing EnCana to pump an extra $600 million into its capital budget for 2005, of which $500 million is attributable to increases in the price of rigs and related services.
That 10 percent hike will not result in more wells being drilled, but what happens at EnCana is a key barometer to the industry as a whole.
The company accounts for about 20 percent of wells completed in Canada and is expected to set the pace for all of North America by drilling about 5,000 wells, reflecting its emphasis on tapping unconventional plays which require more wells.
It has calculated that its own upstream per unit operating costs in the United States are currently about 66 cents per thousand cubic feet equivalent, a jump of 14 cents in the past year, and could climb another 10 percent in 2006.
In looking for ways to ease the inflationary pressures, EnCana aims to have 50 rigs, or 50 percent of its North American fleet, under five-year contracts by early 2006, said company executives.
They said that will ensure that EnCana has access to the “right kind of rigs for our business,” with fixed-price contracts generating flow-through provisions for higher labor and energy costs.
Because of the rigs it is lining up, the company is counting on lowering drilling times by 30 percent.
EnCana Chief Operating Officer Randy Eresman said the company has also entered partnerships and relationships with technical institutes in North America in a bid to bolster the numbers of qualified workers in the service sector.
Ron Eckhardt, Talisman Energy’s vice president of North American operations, said his company is working on holding down costs by fully contracting rigs, building two specialty rigs and increasing alliances with big suppliers.
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