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Alberta budget surplus nosedives, with even tougher times in store Industry organizations predict 20 percent decline in drilling next year, accelerating the shrinkage in North American gas supply, but some say a price turnaround is “inevitable”
Gary Park PNA Canadian Correspondent
Alberta’s official symbol is the wild rose, of which the only operative word these days is “wild.” Otherwise, the bloom is off the rose in a province that has been deficit free for almost a decade and wallowing in budget surpluses ever since, with the prospect of wiping out its remaining debt in time to celebrate its 100th birthday in 2005.
Beaten up by the parallel declines in oil and natural gas prices, the Alberta government is now forecasting a meager surplus of C$12 million in 2001-02, down from its budget forecast of C$815 million and a distant memory from the C$6.4 billion surplus of 2000-01.
And even that razor-thin margin was achieved by slashing C$1.26 billion from current spending, including the deferral or cancellation of C$753 million in capital projects.
“There’s no way we could run a deficit in this province,” declared Finance Minister Pat Nelson. “It’s against the law.”
Having accumulated more than C$20 billion in surpluses over the past eight budgets, the government entered the current fiscal year with what many thought was undue pessimism about oil and gas prices.
Nelson gave what seemed back then to be low-ball forecasts of US$25 a barrel for oil and C$5.03 per thousand cubic feet for gas.
Although Alberta’s resource revenues are still forecast at C$6 billion, bolstered by a strong first quarter, every drop of 10 cents in the price of gas costs the province C$142 million over 12 months, while a $1 change in oil is worth C$153 million.
Forecast ever-weakening It’s not just the current realities that bother Alberta’s political leaders it’s the ever-weakening outlook for 2002, with major E&P companies already hinting at belt-tightening as their cash flows dry up. Most are scrambling to hedge more of their 2002 production, some are shutting in production in the name of accelerating maintenance programs and few are prepared to venture a guess at next year’s capital budgets.
Over the past week, Alberta Energy Co. Ltd. and PanCanadian Energy Corp., Canada’s two busiest drillers and both heavily weighted towards natural gas, made little attempt to disguise their unease about 2002.
Neither was prepared to offer specific capital spending budgets, with AEC President and Chief Executive Office Gwyn Morgan candidly admitting that next year’s production target is a “mystery,” adding “natural gas prices were not sustainable at the levels seen last winter and we all knew that. But neither are they sustainable at today’s depressed levels.”
He said drilling is in sharp decline in both the United States and Canada at a time when, just to stay even with demand, North America must complete enough wells to replace the equivalent of current Canadian production.
North American gas prices in dramatic slump “North American gas prices have slumped dramatically due to the significant contraction in economic growth which has decreased demand in combination with increased utilization of fuel oil, coal and nuclear power,” he said. “The decline in North American production has continued to accelerate and is now widely estimated to exceed 20 percent per year. This much-steeper supply decline means that any respite in industry drilling activity is expected to lead to a weakening of supply.
“We take this period of (commodity price) weakness very seriously,” Morgan said, although he said that with more gas being used than discovered in North America it is “inevitable” that prices will go up again.
AEC, which produced 1.4 billion cubic feet per day of gas in the third quarter, reported that it received C$3.37 (US$2.16) per thousand cubic feet for gas compared with C$5.33 US$3.41) a year ago. To protect its production during the shoulder months, it purchased put options of C$3.80 (US$2.43) per thousand cubic feet, covering daily sales of 200 million cubic feet in September and 370 million cubic feet in October.
PanCanadian slowing selected activities PanCanadian’s third-quarter production averaged 1.049 billion cubic feet per day, for which it received C$5.44 (US$3.48) per thousand cubic feet after a hedging gain of C$1.95 (US$1.25) per thousand cubic feet.
The company said it anticipates continued softness in energy prices into early 2002, but “the long-term outlook for natural gas prices remains robust given the tight supply/demand fundamentals in North America.”
However, in response to lower commodity prices, PanCanadian said it is slowing some “selected activities,” including the development of infrastructure to bring reserves on stream.
Forecasts down The uncertain mood in Western Canada was captured in the 2002 forecast by Petroleum Services Association of Canada, which has set a target of 14,396 wells. An even steeper drop is expected to be forecast by the Canadian Association of Oilwell Drilling Contractors.
The Petroleum Services Association said its new projection will be 3,811 wells short of its 2001 goal, which association Chairman Bill Lingard told a news conference is a “moderate slowdown, certainly not a crash by any means.”
He said association member companies do not expect to make any layoffs in the near future, largely because skilled labor is still in high demand, but he admitted some drilling programs are being cancelled or postponed.
The Canadian Association of Oilwell Drilling Contractors indicated it will soon release a forecast of 13,600 well completions in 2002, down from the 17,300 it expects this year.
Completions through September a nine-month record To the end of September, provincial government figures showed 13,730 completions across Canada, with the Western Canada break-out showing 8,430 gas and 3,649 oil wells.
The nine-month total was a Canadian record, topping last year’s mark by 17 percent or 2,018 wells.
Alberta recorded 10, 215 completions (6,738 targeting gas prospects), Saskatchewan 2,670 (with oil leading at 1,349 wells), British Columbia 740 (557 of them gas completions), Manitoba 75, Northern Canada eight and Eastern Canada 22.
Although Petroleum Services Association president Roger Soucy said the slowdown will give his sector a chance to catch its breath, other forecasters are pointing to even tougher times.
In a new report, Calgary-based investment firm Peters & Co. said capital spending budgets in 2002 will likely be slashed by 30 percent to C$17.6 billion.
“You can see that the signals of the slowdown are out in the field right now,” said Peters’ analyst Miles Lich. “Capital has got to be pared down. You will see all the operators pulling in.”
Across Western Canada last week, 349 of 643 available rigs were drilling, compared with 390 a year ago. Each rig represents about 75 jobs.
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