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Canadian core under siege Finding costs at new high, reserve replacements drop, reinvestment sags Gary Park Petroleum News Calgary Correspondent
Masked by torrents of cash and fat commodity prices, a deep-seated problem is brewing in Canada’s oil patch.
FirstEnergy Capital has identified the fundamental concern in studies that point to climbing finding, development and acquisition costs, slumping reserve replacements and shrinking reinvestment rates.
In summary, the Calgary-based investment dealer said:
• A survey of 64 Canadian E&P companies and U.S.-based companies operating in Canada paid average C$13.19 per barrel of oil equivalent in finding, development and acquisition costs last year — up 18 percent over 2001 and believed to be an all-time high.
• The producers, in replacing 123 percent of production from discoveries, development, revisions, acquisitions and dispositions, hit their lowest level in seven years.
• Cash flow reinvestment for 2003 shapes up as the lowest in recent times, accounting for only C$29.7 billion of a projected cash flow of C$41.9 billion, or just 71 percent of available funds against 92 percent in 2001 and the 100 percent-plus that prevailed in the 1980s.
FirstEnergy counts on healthy financial year But FirstEnergy is counting on a healthy financial year, predicting a return on equity of 21.3 percent in 2003 — well short of the 29.5 percent in 2000 — followed by a sharp decline to 15.2 percent in 2004.
Finding, development and acquisition costs may dip fractionally to C$12.60 per boe this year, with some relief in sight if the Mackenzie Delta natural gas reserves are booked in 2003, but FirstEnergy warns the industry faces a “challenge to spend capital effectively.”
It said the vital need for successful companies is to “show the ability to replace production with actual discoveries or new reserves.”
In the natural gas sector, that is compounded by a 50 percent hike in output over the past three years during a period of stagnant discoveries.
FirstEnergy said the 64 producers replaced 107 percent of production through the drill bit, just barely exceeding production for both oil and gas. Companies with lowest reserve-addition costs tallied Among the senior producers, including large-caps, integrateds and U.S.-based companies, Burlington Resources posted the lowest proven-reserve addition costs at C$5.79 per boe, trailed by Petro-Canada at C$5.92 per boe and EOG Resources at C$8.49 per boe.
Over three years, Petro-Canada had the best showing at C$6.93 per boe, ahead of Talisman Energy at C$7.65 per boe and Apache at C$8.63 per boe.
Of the mid-caps, Peyto Energy Trust led the field at C$5.15 per boe, well ahead of Thunder Energy at C$8.37 at boe and Baytex Energy at C$8.58 per boe.
The top three juniors were Crescent Point Energy at C$6.26 per boe, Rio Alto Resources International at C$6.64 per boe and Great Northern Exploration at C$7.09 per boe.
In the income trust sector, Freehold Royalty Trust did best at C$4.45 per boe, showing the way to Focus Energy at C$5.82 per boe and Harvest Energy Trust at C$5.97 per boe.
On the cash flow front, FirstEnergy’s forecast C$41.9 billion gusher in 2003 will easily outpace 2001’s C$31.6 billion, when capital spending lagged a mere C$200 million behind this year’s predicted reinvestment.
It is forecasting 18,582 well completions this year, topping the 2001 record of 18,137.
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