After four years of severe deterioration, gas-field contractors say the bottom of the slump is behind them and are predicting that Canadian drilling will increase this year.
Firming natural gas prices, temporary cuts in provincial royalties on new production, strong oil markets and reduced costs are credited for a 1,000-well upwards adjustment in the previously bleak forecast of further activity erosion in 2010 by the Petroleum Services Association of Canada (PSAC).
But the recovery projected by the 250-company group is modest and expected to fall short of immediately arresting a steep drop in production described as “free fall” by analysts in the Canadian gas capital of Calgary.
The forecast by the PSAC, whose predictions are widely rated as reliable because the association’s members are in close touch with producers, still calls for just 9,000 wells in 2010 or an increase of only 550 or 6.5% from the 8,450 drilled in 2009. The group also did not withdraw a prediction that the prime drilling target will be oil, which is expected to account for a 52% majority of Canadian wells for the first time in memory.
Beginnings of the long-awaited recovery have been showing since late last fall, the annual onset of the Canadian drilling season, which relies on cold weather to freeze marshy northern ground hard enough to support heavy equipment. As of this week 558 rigs were in action across western Canada, a 20% increase compared to late January of 2009. Although the fleet has been reduced by 42 units over the past year — with some equipment mothballed or scrapped, while advanced technology units have landed overseas assignments — contractors report they still have 805 rigs ready to work in western Canada.
The seasonal pattern of Canadian drilling makes forecasting difficult. Wary contractors say they will only be able to gauge the extent of the forecast recovery when they see if it lasts beyond the annual winter field work flurry.
“Improved prices led to a spurt in drilling in December,” PSAC President Roger Soucy observed. “We are cautiously optimistic about 2010. Commodity pricing signals have been positive so far but this may not be the quick and complete turnaround everyone is hoping for. The real test will come after spring breakup.”
The prolonged drilling decline — chiefly in Alberta as the source of more than four-fifths of the nation’s gas, with up to 60% of output exported to the United States — set in after international prices fell off the 2005 peak caused by hurricane damage to production installations in the Gulf of Mexico.
Across western Canada, total drilling for all targets fell by 66% from the 2005 record of 24,666 wells to bottom out at the 8,450 low of 2009. Drilling for natural gas fell faster than the overall drop because its prices continued to decay while oil markets recovered. Canadian gas wells fell by 78% to 3,815 last year from the record 17,150 of 2005.
FirstEnergy Capital Corp., a Calgary-based investment house that makes a specialty of tracking gas markets and field activity, estimates that the drilling slump cut Canadian production capacity by 416 MMcf/d in 2007, 638 MMcf/d in 2008, and 1 Bcf/d last year. In 2010 the firm’s analysts expect a further production loss of 1.2 Bcf/d because the partial drilling recovery will be too weak to make up for supply erosion brought on by the long decline.
But dropping expenses partly brought on by heightened rivalry among hungry field contractors are helping to put a floor under field activity. Western Canadian average finding, development and acquisition costs have fallen over the past year by about 30% to a current C$16 (US$15) per boe, or C$2.67/MMBtu for gas, FirstEnergy estimates.
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