Canadian oil and natural gas exploration and production companies are alive and well, thriving on robust cash flows and strong commodity prices that will likely continue into the fourth quarter.
Leading Canadian independents, such as EnCana Corp., Nexen Inc., Talisman Inc., and Canadian Natural Resources Ltd., are expanding their E&P activities, both domestically and internationally, and some are testing the potential of unconventional energy sources, such as coalbed natural gas (CBNG) and wind power.
Industry associations are projecting strong Canadian drilling totals for 2003, with a possible record tally of as many as 20,000 wells.
The Canadian Association of Oilwell Drilling Contractors (CAODC) estimates 17,532 wells but will review that figure at the end of October. It expects a rig utilization rate of 398 rigs, or 60%, in the fourth quarter.
Smaller independents, meanwhile, are now enjoying better access to financing from lending institutions. They also are finding exploration opportunities in the Western Canada Sedimentary Basin (WCSB). And there has been a surge in start-ups among smaller independents, many of them initiated by management teams that previously worked for large independents, such as Anderson Exploration Ltd. and Canadian Hunter Ltd. In 2001, however, US firms took them over in a merger and acquisition splurge for Canadian gas reserves.
Kyoto Protocol concerns
Canada's ratification of the Kyoto Protocol on Climate Change in late 2002 remains an issue, but there has been some effort by Ottawa to alleviate industry's concerns.
There are also continuing concerns about land access regarding E&P costs, which continue to rise. Ziff Energy Group, Calgary, says average oil well operating costs increased to $6.85/boe in 2002 from $6.50/boe in 2001. The average gas well operating costs increased 3% to 70¢/Mcfe in 2002. Ziff said most costs continued to rise in 2003.
Greg Stringham, vice-president of the Canadian Association of Petroleum Producers (CAPP), said there has been some clarification from Ottawa on how the industry would be treated under the protocol in a letter from Prime Minister Jean Chretien.
"The understanding that we'll be treated in a certain manner has been documented. It does provide some certainty to the industry going forward," Stringham said.
"More and more, I see a shifting of major independents to development of oil sands and particularly in situ projects. It takes huge dollars to get into mining projects, but there is a sizeable bite that can be taken in in situ projects."
Stringham said that Ottawa has quantified the risk of the Kyoto Protocol. He said companies know the cost that could be added to their projects, and they can factor that into their economics.
Association forecast
The CAPP executive said companies looking at oil sands projects also are researching new technology to replace high-priced natural gas with some other form of fuel.
Stringham forecast that industry could drill as many as 20,000 wells this year—and yet land access remains an issue for independents, particularly given the high level of activity.
The Small Explorers & Producers Association of Canada (SEPAC), which represents 410 independents, said companies are operating in a very positive environment.
Outgoing SEPAC Chairman David Wolf said companies are focused on pursuing opportunities that are there. He said raising funds, which was a problem a year ago, is now relatively easy and straightforward. Timely land access also remains an issue.
"They are also mindful that costs are rising due to increasing activity. There is a shortage of rigs, and things do get a little tight. There is a need for more project planning, but I don't think people feel we've reached the stage where things are just totally unavailable."
Encana forges ahead
Meanwhile, Canada's top independents are forging ahead on both domestic and international projects.
EnCana, Canada's largest independent, recently shipped its first tankerload of 705,000 bbl of Ecuadorian oil to the US. The cargo was offloaded from the Balao terminal at the end of the recently completed $1.4 billion OCP pipeline, which carries heavy crude oil from Ecuador's Oriente basin to the coast for export.
EnCana CEO Gwyn Morgan said with the pipeline starting up deliveries of production from the Oriente basin, the company is producing more than 90,000 b/d of oil with a 2004 target to reach 100,000 b/d of oil.
EnCana also is the largest landholder in Western Canada and has operations in the US Rocky Mountains, the deepwater Gulf of Mexico, and the North Sea.
The company has a capital budget of $5 billion (Can.) in 2003, with 75% allocated for gas projects in North America.
EnCana also has locked up a large land position in what could the next big gas play in northeastern British Columbia. The company accounted for 84% of a record sale totaling $418 million (Can.) in the Cutbank Ridge area, about 30 miles southwest of Dawson Creek, BC. Other companies are also active in establishing land positions in the area.
"There has been a worldwide structural shift in the oil and gas industry, creating five supermajors, five regional majors, and five North American superindependents, including EnCana," Morgan said. "There are also half a dozen medium-sized independents, and smaller companies below that; these include start-ups and royalty trusts."
Morgan added, "The supermajors and regional [companies] have turned from traditional North American and North Sea basins to Africa, the Middle East, and the countries of the former Soviet Union. This leaves the independents as the drivers of the traditional basins.
"EnCana is a prime example of this shift, as the largest North American landholder and explorer and one of the leaders in a renaissance of exploration in the North Sea," Morgan noted.
Nexen's operations
Nexen—which has wide-ranging operations in Canada, the Gulf of Mexico, Yemen, Nigeria, Australia, and Colombia—also is moving in new directions.
CEO Charlie Fischer says large independents are moving into new areas and using new technologies because the traditional WCSB is getting tired, with steep declines and relatively high finding and development costs. He said companies now are looking at oil sands development with upgraders, CBNG, and tight gas sands, where new technologies are creating new opportunities.
Nexen, Fischer said, is diversifying into deepwater technology in its Gulf of Mexico and West African operations to access new, less mature, basins.
Fischer said the company has an extensive CBNG land position in Alberta, with two pilot projects in operation. The company is aiming to have at least one of these projects commercial in 2004.
Fischer said that the oil industry as a sector has been working hard with Ottawa to define its position and obligations under the Kyoto Protocol and that some progress has been made. But he said additional clarification is needed beyond 2012, particularly for long-term, high-cost ventures such as oil sands.
He said another issue is finding qualified drilling crews because of traditional drilling patterns with peaks and slumps in activity. Fischer said that industry is working with the service sector to find ways to smooth some activity so that it is not a boom-and-bust cycle for employees.
For example, he said, there are wells drilled in the peak winter season which could probably be postponed until spring.