Late winter, price uncertainties spoil Christmas for Canadian drillers

But holiday freeze-up raises hopes for contractors after falling a month behind last year's pace; E&P companies anticipate 20 percent cut in 2002 capital spending

Gary Park

Canadian Correspondent

The first blast of winter across Western Canada has brought holiday cheer to oil and gas drilling contractors after a prolonged spell of warm weather delayed the start of the peak exploration season.

Temperatures diving towards minus 20 degrees across northern Alberta and British Columbia have finally started to freeze the swampy land, allowing contractors to truck in rigs more than a month behind last winter's pace.

But there is still widespread unease among the contractors because of uncertainty over oil and gas prices and demand, that has prompted E&P companies to trim their 2002 capital budgets by 20 percent.

Calgary-based Enserco Energy Service Company Inc., an integrated service company with almost 2,000 employees in Canada, took the unusual step recently of saying it would not comment on its prospects for 2002 financial and operating results because of the volatile markets.

President and Chief Executive Officer John Hokanson said the weather has been a factor in Enserco's reluctance to make predictions, but a bigger factor has been the reduced cash flows of E&P companies.

Ensign Drilling Inc. reported before Christmas that only 30 of its 85 rigs were active, at a time when the company usually expects to mobilize up to 80 percent of its fleet.

All we can hope for is that winter lasts long enough for us to get 60 to 90 days of drilling in, said Ensign senior operations manager Bob Zanusso. Then the window becomes smaller and we start to worry about when breakup is to arrive again.

Number of active rigs high

An average 398 units were at work through the year, up 2 percent from 382 active rigs in 2000, but short of the 424 units in the peak year of 1997.

Rig utilization was the sixth highest on record since 1989 as an expanding fleet of available rigs combined with the second half slump pushed the rate down to 61 percent from 63 percent in 2000.

But the final surveys of the year showed rig utilization sliding towards 50 percent or 347 active rigs, compared with 554 rigs representing 89 percent of the fleet a year earlier.

Alberta's operators kept an average 297 rigs working through 2001, compared with 293 in 2000. British Columbia, sparked by interest in its northeast gas plays, experienced a banner year with 52 active rigs, up 30 percent from 2000. Saskatchewan dropped 15 percent to 40 active rigs, while northern Canada had an average of only one rig over the year.

Canada's drilling fleet grew for the fifth straight year, increasing by 6 percent to 638 available rigs and finished the year with 661 rigs a gain of 200 rigs since 1996.

To the end of November, the industry has rig released 17,099 wells, up 4.6 percent from the same period of 2000, with more than half listed as gas wells.

2002 outlook hangs in balance

Under the current conditions of high storage levels and weak demand, we expect Canadian rig counts to decline further through the first half of 2002, the survey said.

It found the 81 E&P companies plan to spend about C$17.9 billion in 2002, compared with an expected C$22.5 billion in 2001, with subsidiaries of U.S.-based independents planning on the sharpest spending declines.

The largest upstream cuts in Canada are expected from Devon Energy Corp., Conoco Inc. and Burlington Resources Inc., which have slashed their combined budgets by C$1.7 billion to C$2.01 billion.

In contrast the major Canadian-based companies Alberta Energy Co. Ltd., Canadian Natural Resources Ltd., Talisman Energy Inc. and Petro-Canada ? are lopping a combined C$708 million off their 2001 budgets for a total spending program of C$4.69 billion.

Of that quartet, Petro-Canada actually plans a modest increase of C$31 million to C$1.55 billion and Talisman is virtually unchanged in its spending intentions at C$865 million.

Average 2002 price forecasts by U.S. and Canadian producers were US$20.72 per barrel of oil and US$2.83 per thousand cubic feet of gas, with many more bullish companies counting on gas prices topping US$3.

With those assumptions, the bulk of Canadian companies expect to increase their gas drilling for the fifth successive year.