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Canadian E&P companies keep tight hold on purse strings Government land sales lag well behind last two years, despite positive prices; soft gas demand in United States and high storage levels outweigh production declines; big U.S.-based independents unloading non-core assets, restructuring Gary Park PNA Canadian Correspondent
Everything points to a year of extreme caution on Canada’s oil and gas exploration front, as operators keep a tight grip on their purse-strings, with the big U.S.-based independents who made heft Canadian purchases in recent years immersed in restructuring and unloading non-core assets.
Sales of government-owned exploration rights have experienced a nosedive, capital spending lagged 9 percent behind 2001 to the halfway point and the industry entered October with just 39 percent of the 662-rig fleet in the field.
“Something has to explain why companies are sitting on their hands in spite of high commodity prices” said Don Hertring, president of the Canadian Association of Drilling Contractors. “Clearly, there is a bunch of uncertainty out there.”
Industry reluctant to spend Analysts say the factors include a move by Canadian-based companies to extend their international presence, the growing ranks of royalty trusts which direct their cash flow to unit holders rather than into increasing their reserves and the pending ratification of the Kyoto Protocol.
The merger-wave has also been a drag on drilling, notably the marriage of PanCanadian Petroleum Ltd. and Alberta Energy Co. to form EnCana Corp. The two firms completed a combined 3,000 wells a year; at the current pace EnCana is projected to fall short of 2,500 this year.
Hanging over the industry is a reluctance to spend in the current uncertain and often dismal economic outlook, said Dale Tremblay, chief financial officer of Precision Drilling Corp., Canada’s largest petroleum services firm.
Land spending down by half For the first nine months of 2002, companies invested C$632 million for exploration rights and made another C$16.5 million in work commitments — C$14.3 million in the Northwest Territories, C$1.2 million in the Yukon and almost C$1 million in Saskatchewan.
In the frantic scramble to secure land rights last year, producers spent C$1.33 billion in the January-to-September period to acquire rights and C$20.3 million on work pledges, with C$17.4 million going to the Northwest Territories and C$29 million to the Yukon.
The industry paid just over C$1 billion for land rights and committed a further C$527.8 million in the first nine months of 2000.
Average prices for land sales reflected the low-key mood, slumping to C$211.45 per hectare (one hectare is equivalent to 2.471 acres), from C$342.63 last year and C$298 in 2000.
Heavy setbacks in hotspots The usual exploration hotspots in Alberta and British Columbia have experienced the heaviest setbacks this year.
Alberta collected C$392.9 million to the end of September, compared with C$904 million in 2001 and C$789.3 million two years ago, while total hectares slumped to 2.19 million from 2.93 million in 2001 and 2.67 million in 2001.
British Columbia also went into a nosedive, selling 502,514 hectares for C$188.12 million over the first three quarters of 2002, compared with C$383.9 million for 699,645 hectares last year, but almost on a par with 2000’s C$188 million for 527,089 hectares.
The widely held explanation among analysts for the reluctance by E&P companies to expand their land portfolios is the unclear message from gas markets, especially in the United States, where an absence of demand growth and high storage levels are outweighing concerns about production declines.
Even so, Canadian E&P companies enjoyed a nearly 13 percent return on revenue during the second quarter to tally profits of C$3.5 billion.
Third quarter figures will start to be released in late October and are expected to show some improvement over the same period of 2001, when stratospheric gas prices had returned to normal.
Survey confirms unease The unease was confirmed in an August survey of North American oilfield operators by UBS Warburg LLC, an investment banking and securities firm, which said a deterioration in spending and drilling activity gives little hope for strong growth in activity levels over the next couple of months.
The survey found 11 percent of operators planned to cut spending over September and most of October, 48 percent planned no change and 41 percent planned an increase, down from 48 percent in July.
In Canada, rig activity showed modest third-quarter recovery, but still fell short of year-earlier levels, said investment dealer Peters & Co.
Duane Mather, president of Nabors Drilling Ltd., said it was difficult to understand third-quarter rig utilization. “At no time in my career have we seen commodities going in the right direction and yet we can’t seem to generate activity,” he said.
Operating costs up One disturbing trend for E&P companies is contained in a new study by Ziff Energy Group, which has estimated that operating costs in Western Canada’s oil and gas fields recorded a sharp increase in 2001— up an average 18 percent for gas and 9 percent for oil from the previous year.
The Calgary-based consultant said in mid-September that increased costs of electricity and field services were the primary factors, stemming partly from higher costs for gas used as fuel for compression in the first half of 2001.
The study of 195 oil and gas fields showed average gas operating costs jumped to 69 cents per thousand cubic feet equivalent from 58 cents, while oil costs rose to C$60 per barrel of oil equivalent from C$6.10.
When gas prices soared as high as C$13 per thousand cubic feet, the attitude among many E&P companies was to shrug off operating expenses in favor of increasing production, said Court Mackid, Ziff’s director of Canadian E&P services. But, in those circumstances, costs can tend to rise considerably more than production volumes, he said.
Paul Ziff, chief executive officer of the consultancy, said that although prices have retreated slightly this year “we expect continued volatility the next several years”
He said Ziff, for the last two years, has urged its clients in Canada and the United States to “commence programs that manage their energy use more efficiently.”
But Ziff has discovered that a major challenge for companies in Western Canada is to find the time to break away from the daily focus on production and evaluate what they are doing and how to do things better.
“Reducing operating costs is the quickest lever for producers and some proactive companies are reviewing the operating cost of every property they operate,” said Ziff, whose company has developed a consulting service to recommend ways of operating fields more efficiently.
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