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Forecasts Suggest Canadian Drilling Revival

A Canadian natural gas drilling revival has begun and producers are on the trail of a hot supply development prospect in northern British Columbia, field contractors and provincial mineral rights sales confirm.

The Canadian Association of Oilwell Drilling Contractors (CAODC) raised its forecast for 2008 by 28% to 18,000 completed wells. CAODC set aside its previous prediction of declining activity with only13,735 wells made late last year amid Alberta provincial royalty increases and the increasing value of the Canadian dollar that had the effect of compounding soft gas prices (see NGI, Nov. 5, 2007).

The Western Canadian Sedimentary Basin has been a challenge for producers in recent years, but the success from unconventional plays in the Lower 48 has led many to revise their "gloom and doom" outlook for the region, a Nexen Inc. executive said last week (see related story)

The new CAODC outlook suggests that drilling contractors believe the recovery will be stronger than expected by peers in the Petroleum Services Association of Canada (PSAC) that supply other technology and field activity support. PSAC recently raised its 2008 well projections by 14%, also citing improving gas sales and prices as compensating for unfavorable exchange rates and a lingering psychological shock from the first Alberta royalty increases since the early 1970s.

BC mineral rights sales highlight an industry trend towards concentrating on larger, deeper and more technical drilling targets that was becoming apparent before Alberta adopted a general royalty increase, effective next January. Shallow drilling that generated record well counts in 2005 and 2006 was running down, thanks to a combination of rising costs and shrinking targets in over-exploited fields beneath easily accessible terrain in southern Alberta and southwestern Saskatchewan.

About four-fifths of drilling and production continue to focus on Alberta, but the activity's character is changing as attention migrates to deep targets in the foothills of the Rocky Mountains and the choicest "unconventional" formations such as "tight" or relatively impermeable rock layers and coalbed methane.

In BC, known among producer veterans as the industry's "near frontier," highly technical northern geological targets called Montney and Horn River have attracted increasing interest from senior producers and specialists such as EnCana, Petro-Canada, EOG Resources, Apache, Nexen and Devon. Unknown producers were behind a new record of C$441 million set for a BC mineral rights sale by the province's May auction (see related story). Total BC drilling rights sales this year hit C$758.5 million, more than a seven-fold jump from C$101 million during the first five months of 2007.

BC drilling targets are often being scooped up by land brokers, who obey a strict code of silence for clients in order to keep to a minimum the herd effect of industry household names attracting more auction bidders if their identities become known before they lock up large lease spreads. Shell Canada, one of the country's top producers and renowned for technical expertise, was rumored to be involved in the May BC auction.

The BC geological targets are so tight they are being described as "unconventional" and compared to the Barnett Shale in northeast Texas. Horizontal wells and intensive use of "fracing," or high-pressure injections of fluids and gases to fracture rock with flow channels, are routine elements of emerging BC and Alberta foothills drilling programs.

Well costs are in the range of C$5.5 million, according to Calgary energy investment boutique Peters & Co. But expenses are quickly recovered by production of 2.7-4.7 MMcf/d.

The high costs include at times considerable outlays for infrastructure such as access roads and pipelines because the new BC targets are in muskeg areas beyond regional industrial centers of Fort St. John and Nelson. The Peters firm calls the area "extremely underdeveloped from an infrastructure standpoint." But industry veterans see the region as a logical place to expect a lasting supply growth trend to develop. Canada's drilling near the frontier, unlike the far Arctic exploration outposts of the Mackenzie Delta, is within reach of inlets to the Alliance Pipeline export route from Fort St. John to Chicago and the northern-most branches of the TransCanada-Nova gathering web in Alberta.

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