After months of predicting that a price and drilling recovery was just around the corner, Canadian natural gas producers are setting aside forecasts and settling down to wait for markets to tighten up.
The determination to be strictly realistic reaches to the top of the industry, where Canada’s second-biggest producer says drilling will be slow to climb back out of the tank that activity fell into last spring.
“We’re a long ways away,” Canadian Natural Resources Ltd. President Steve Laut said in an interview as he refused even to guess when the top money-earner in the province’s energy industry will make a comeback.
The firm’s second-quarter financial statements showed it drilled only seven gas wells April through June, an 85% cut from 48 wells in the same period of 2006. In the first half of 2007 Canadian Natural and its gas-drilling partners pared down to 254 wells, a 59% drop from 616 wells during January through June last year.
The reduction was part of a Canadian industry-wide trend brought on by erosion of gas prices from double-digit peaks hit in the 2005-06 heating season after hurricanes damaged production in the Gulf of Mexico, the company said. Steeply rising costs for field equipment, services and labor made strong contributions to the trend, Laut added.
Gas has to rebound to C$8 (US$7.60)/Mcf or more to rekindle aggressive drilling, Laut said. Alberta production currently fetches prices well below the improvement target and shows signs of languishing in the range of C$4.50-5 (US$4.27-4.75), he added.
Weather-driven market spikes, caused by spurts of urgent demand for heating and power plant fuel, will not restore the increasingly strained industry faith that prices will cover increased drilling costs. It will take a sustained price recovery into the C$8-plus range to restore deep cuts made in gas-field budgets such as reductions of 40-50% in Canadian Natural programs, he predicted.
The company is remaining as Canada’s second-largest gas producer after EnCana Corp. by “high-grading” or only drilling into its best geological prospects and letting total output stay flat or dip until prices recover. There is little or no danger of Canadian Natural being overtaken, because its rivals are largely marking time too. Most of the industry is following Canadian Natural’s example, say contracting, service, supply and manufacturing firms that rely heavily on gas work. Natural gas drives about 70% of Alberta drilling and generates up to three-quarters of provincial royalties.
Total wells drilled across western Canada will drop 24% to 17,650 this year from 23,306 in 2006, the 270-company Petroleum Services Association of Canada said in an annual summer forecast. Alberta drilling is projected to drop by 27% to 12,815 wells. Activity in more remote, costlier northeastern British Columbia will take a 42% dive to 795 wells.
As of last week 378 drilling rigs were working across the western provinces, the Canadian Association of Oilwell Drilling Contractors reported. The total is up from a May bottom of only 93 rigs working. But the current tally is still only 43% of 885 units available. In Alberta 277 or 39% of 706 available rigs are operating.
The lull is reducing industry expenses by making contractors cut fees to compete for scarce work. Rates have dropped as much as 20% in the most gas-prone regions such as southern Alberta, Laut said. But costs are staying high in busier oil drilling areas such as the heavy oil and oil sands bitumen belt northeast of Edmonton, he added.
High crude prices are driving a switch in drilling budgets to oil by producers with suitable mineral rights portfolios, including Canadian Natural. Big producers can turn attention to oil sands “in-situ” underground production sites that use drilling techniques. Canadian Natural has such opportunities in abundance as well as its C$6.8 billion (US$6.5 billion) oil sands mining megaproject under construction north of Fort McMurray in northeastern Alberta.
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