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Canadian Drilling Rate Drops; Industry Sights on Deeper Wells

While settling down to a pace described as "sedate" compared to the frenzied activity of the last two winter work seasons, western Canadian drilling instead appears to be chasing bigger natural gas targets.

Talisman Energy Inc. -- a leader that never gave up its place in the hunting ground that is now regaining favor -- highlighted the rewards driving the switch with two fall announcements from a secretive area where results are often kept confidential for as long as possible due to keen competition for drilling leases.

A single exploration well in the Ram River area of the central Alberta foothills of the Rocky Mountains, a rugged and remote region southwest of Edmonton, flowed 17 MMcf/d in production tests for Talisman. Three follow-up wells flowed more than 20 MMcf/d combined. While far from besting Canadian record wells with flows exceeding 100 MMcf/d, the foothills targets are up to 20 times bigger than the shallow and coal seam reserves on the eastern Alberta and western Saskatchewan plains that have dominated drilling since the early 1990s (see Daily GPI, Sept. 14).

The foothills results prompted Talisman to launch an immediate, C$100 million (US$90 million) drilling and production program forecast to yield up to 300 Bcf of reserves from 48 square miles of Ram leases. Besides opening up a new geographic area, the drilling successes established the Cambrian geological layer as an entirely new target for Alberta gas exploration.

The Ram announcement came two weeks after Talisman chalked up its 54th drilling success elsewhere in the foothills since 2003 with a well described as "prolific." A production test restricted by limited surface equipment flowed 14 MMcf/d, and Talisman estimated the rate would be 94 MMcf/d if its drilling rig could handle a fully open flow. The exact location of the big well was not announced.

Talisman emphasized it and partners control about 1,200 square miles of potential foothills gas properties where 11 wells are currently being drilled and 30 more are planned next year. Once mastered, the rugged terrain and complex geology of the vast foothills region of Alberta and British Columbia, stretching from the U.S. border to the southern boundary of the Northwest Territories, is a rich gas hunting ground. Company geologists have generated about 200 exploration leads on the Talisman spread alone, and estimate it harbors 3 Tcf of reserves.

Overall western Canadian field activity is shaping up to stay in line with lowered expectations announced by the Canadian Association of Oilwell Drilling Contractors (CAODC) and the Petroleum Services Association of Canada (PSAC). As of Nov. 9, the number of active rigs stood at 463 -- down by 26% from 622 a year earlier.

The slowdown is relative. The number of rigs in action is still high by historical standards in a region that only had about 500 rigs until the late 1990s. The western Canadian fleet mushroomed to 830 rigs over the past two years as contractors fielded new equipment to keep up with growing producer demand, most often for a new generation of shallow drilling technology operating at an accelerated pace.

This fall the pattern of activity has turned around. An estimated 68% of active western drilling rigs are working on deep, large targets such as the Talisman wells. The proportion employed on shallow and coalbed methane targets, formerly the top industry priority, has dropped to an estimated 38%. CAODC, in a new forecast varying only in detail from an earlier outlook released by PSAC, predicted total Canadian wells drilled will drop 15% in 2007 to 19,023 from a projected record of about 22,298 this year.

The setback is blamed on a combination of soft gas prices and decisions by producers such as Canadian Natural Resources Ltd. to put a stop to runaway inflation in drilling costs by slowing down competition for contractor equipment and field workers. The deceleration is projected only to hold drilling back to its 2003 pace. But the slowdown will be enough to restore support for a gas price recovery by limiting growth in Canadian supplies or possibly even allowing production capacity to slip, FirstEnergy Capital Corp. predicted.

In a research report to investors, FirstEnergy described the reduced activity pace as "sedate" and predicted stagnant to deteriorating total production capacity for the next few months to a year. Total production is up by 320 MMcf/d so far this year but could recede by as much as 600 MMcf/d over the next 12 months, the Calgary investment house estimated. On top of soft prices and producer moves to control field costs by spreading drilling programs over longer periods, the industry mood of "hesitancy and conservatism" is bound to be deepened by Ottawa's Oct. 31 decision to tax income trusts, FirstEnergy wrote.

Depending on who makes the count, about three dozen trusts have an estimated 15% to 18% of western Canadian gas supplies. The tax policy decision was promptly ratified by Parliament in Ottawa in a budget motion vote Nov. 7, and already prompted some trusts to scale down or cancel fund-raising sales of corporate debt and equity paper.

The immediate pain among the trusts is liable to pay off later in gain on the gas markets, FirstEnergy suggested. "Any additional slower drilling pace, though perfectly understandable in these uncertain legislative times, will only compound the tightening supply picture," the firm's research department wrote. "Given what are legitimate and growing supply concerns in Canada and the U.S., a tightening market balance could be emerging even more quickly than many suspect . . . we would be happy to suggest some upside in our natural gas price forecast."

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