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Western Canada Witnessing Upturn in Drilling Activity

After coasting for a year, western Canadian natural gas drilling is shifting back into gear and producers are starting to accelerate activity, field contractors reported.

The 270-company Petroleum Services Association of Canada (PSAC) increased its 2008 activity forecast to 16,500 wells, up 14% from a previous prediction of 14,500 wells made as Canadian gas languished in a market low to flat prices and unfavorable currency exchange rates last fall.

Nearly 12,000 wells, or three-fourths of western Canadian drilling, will be in gas-prone Alberta this year even though oil exploration is on the rise in Saskatchewan and Manitoba, PSAC added. "While all the talk of late is centered around the rising price of oil, it's actually the price of natural gas that really impacts the industry in Canada, especially in Alberta," said PSAC President Roger Soucy. "Pouting" and shock over Alberta's royalty review and rate increases announced for 2009, which soured the industry mood for half of 2007, are also fading, Soucy suggested.

The new drilling forecast follows increases in Canadian heating season gas prices and export revenue since last October. The gains, after nearly two years of decline, prompted predictions by Canadian industry analysts such as GLJ Petroleum Consultants, FirstEnergy Capital and Peters & Co. that annual average gas prices will rise by one-third or more this year to C$8-10 per gigajoule (GJ) (US$8.23-10.30/MMBtu).

During the 2007 attack of the blues, a consensus forecast emerged that the minimum price needed to restart western Canadian mainstays of shallow conventional drilling and coalbed methane was C$8/GJ. Sharply increased costs and shrinking geological targets were blamed for the raised barrier along with changed economics under Alberta's new royalty scale with increased ceiling rates and price sensitivity.

"The price of natural gas has been below a threshold where it was economical to drill certain wells. However, cautious optimism regarding a sustained increase in the price of gas is leading to increased drilling activity," Soucy said.

Canadian wells completed peaked in 2006 at 22,127 and fell to 19,144 in 2007. The last time the number dipped below 20,000 was in 2003. Despite the emerging recovery, the PSAC predicts 2008 western Canadian drilling of 16,500 wells will still be down compared to 2007.

PSAC's 2008 projection of 11,748 Alberta wells remains down by 15% from last year. Up to three-quarters of Alberta drilling is for natural gas targets.

In British Columbia, where almost all drilling is aimed at gas, PSAC forecasts 800 wells this year or a 9% decrease despite discoveries of new northern geological targets and technology yielding access to old ones previously considered too complex or difficult.

The profile of British Columbia is rising. Nexen Inc. recently became the latest of several pedigreed gas producers to track down success in the emerging shale prospects in the Horn River Basin (see related story).

Saskatchewan drilling is projected to increase by 4% to 3,525 wells this year, but gas is not expected to cause the increase. Lofty oil prices drew the industry to a previously uneconomic target geological known as Bakken. A southern Manitoba arm of the oil formation is expected to fuel a 9% drilling increase to 350 wells.

The revival of field activity is expected to be too slow to prevent at least a temporary deterioration of western Canadian supplies. Industry analysts continue to predict production capacity could drop as much as 1 Bcf/d or about 6% by the end of this year before gradually accelerating drilling at least slows down the decline, especially in picked-over Alberta conventional gas fields.

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