Special Report: Canadian drilling activity continues to slow

Oct. 27, 2008
Canadian drilling continues its decline, but Canadian drillers are diversifying, sending rigs to the US and abroad, purchasing US rig fleets, and continuing to upgrade equipment.

Canadian drilling continues its decline, but Canadian drillers are diversifying, sending rigs to the US and abroad, purchasing US rig fleets, and continuing to upgrade equipment.

Although Canada is the world’s third-largest producer of natural gas, it is slowly becoming a net importer due to its severe climate and high level of industrialization. Canada usually exports a significant amount of energy output, predominantly to the US, but when the electrical grid is under pressure, provinces buy power back from the US.1

Roger Soucy, president of the Petroleum Services Association of Canada (PSAC), told OGJ that the new increased government royalty rates in Alberta will come into effect Jan. 1, 2009, and will “negatively affect future activity.” The value of drilling and service companies on the market is also depressed due to the price of oil, which has fallen to less than $100/bbl from $147/bbl earlier this year, and the impending crash of the financial and credit markets, he said.

On the upside, Canada’s oil exports increased to nearly $31 billion (Can.) in first-half 2008, although volumes did not increase from 2007. The Weekly Energy Bulletin for Sept. 22-26, published by Nickle’s Canadian Oil Register, pondered that “record oil prices and slowly growing export volumes could result in the value of the country’s oil exports reaching an all-time high of around $60 billion or more this year, easily smashing the 2007 record of $41.5 billion.”

Forecasts

On July 25, PSAC predicted drilling activity will decrease 11% in 2008, in an updated Canadian drilling forecast.2 The initial release of the 2008 forecast in October 2007 projected 14,500 wells would be drilled in 2008. But in April, PSAC revised this upward to 16,500 wells in 2008.3 The July update reiterates the prediction of 16,500 wells, noting that this is still 11% fewer than the total number drilled in 2007 (18,557 wells).

On Apr. 23, PSAC‘s Soucy said, “While all the talk of late is centered on the price of oil, it’s actually the price of natural gas that affects the industry in Canada, especially in Alberta.” With so much focus placed on the oilsands, he said, many, “including our government, seem to overlook the fact that the conventional—gas-based—industry is still where the vast majority of royalties and other industry revenues to the government and Albertans come from.”

Among the provinces, PSAC forecasts:

  • 11,815 wells in Alberta, down 15% from 2007.
  • 820 wells in British Columbia, down 6% from 2007.
  • 3,445 wells in Saskatchewan, up 1% from 2007.
  • 360 wells in Manitoba, up 12% from 2007.
  • 40 wells in Ontario, down 13% from 2007.
  • 14 wells in eastern Canada (Quebec, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland-Labrador), down 42% from 2007.

PSAC also predicts that another six wells will be drilled in northern Canada this year (Yukon, Northwest Territories, Nunavut), down 25% from 2007.

Market index

PSAC, Canada’s national trade association, represents more than 270 companies in the service, supply, and manufacturing sectors of the upstream petroleum industry. The Canadian Index compiles the market performance of the Top 30 (by market cap) Canadian, publicly traded PSAC member companies (Fig. 1).

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The data show a drop in the PSAC index to about 140 at the end of September, from a high of 200 in mid-June.4 The index in mid-September was 30 points below its position a year earlier (170), attributable to change in the taxation regime in Alberta (OGJ, Oct. 22, 2007, p. 50) and to general downturn in the financial markets. This was followed by a precipitous fall in mid-September to a low of about 90 in mid-October. This decline is not limited to Canada; the Philadelphia oil field index of US companies shows a similar decrease.

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Companies are added or removed from the PSAC Top 30 list quarterly.

Drilling contractor mergers

Several Canadian drilling contractors have acquired US-based fleets in the past year.

In June, Calgary’s Savanna Energy Service Corp. purchased five drilling rigs and equipment from privately held GreyStone Drilling LP for $59 million ($11.8 million/rig).5 All five of the rigs are working in the Haynesville in Louisiana and Texas.

Precision Drilling Trust is in the final stages of acquiring Houston-based Grey Wolf Inc., one of the largest US drilling contractors. Based on footage drilled in 2007 and the size of its US land drilling fleet (120 units), Grey Wolf is the fifth largest drilling contractor, with a market capitalization of $1.9 billion (OGJ, Sept. 1, 2008, p. 39).

The merger is worth $1.12 billion in stock and cash, working out to $9.3 million/rig. Pro forma ownership of the new company will be 75% Precision Drilling and 25% Grey Wolf.

According to Precision Drilling’s presentation at the Peters & Co. Ltd. North American Oil & Gas Conference on Sept. 11, the rationale for its merger with Grey Wolf is to:

  • Build high-performance rigs at lower cost.
  • Introduce superseries rigs to new customers.
  • Drill North American oil and gas shales.
  • Grow internationally, targeting global oil.

The fleet of the combined company will include 371 drilling rigs, 19 newbuilds, and 229 service rigs; second only to Nabors Drilling in North America. Most of the new combined fleet is in Canada (221 drilling rigs, all service rigs). Another 147 drilling rigs are in the US, as well as 2 in Mexico and 1 in Chile, as of Aug. 22.

Fleets

Savanna Energy Services offers drilling services through three subsidiaries: Trailblazer Drilling Corp., Lakota Drilling, and Akuna Drilling Inc. The average age of the 104-rig fleet is less than 5 years. Drilling accounts for 80-85% of the company’s revenues, and well-servicing 15-20% (through Savanna Well Servicing).

According to Savanna’s second-quarter 2008 results, announced Aug. 5, the company has expanded its rig fleets into southern Saskatchewan (6 drilling, 8 well service) and the US (14 drilling). Expecting a strong demand in 2009, the company has also increased its 2008 capital construction program by $54.5 million to a total of $150 million for the year. The new allocation covers four additional heavy-duty double drilling rigs, two double service rigs, drill pipe, and other equipment, expected to be in service by third-quarter 2009.

Calgary’s Savanna Energy Services Corp. has 46 hybrid drilling rigs in its fleet, capable of running coiled tubing or conventional jointed pipe with top drives and automated pipe-handling equipment (Fig. 2; photo from Savanna Energy).
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Savanna is enhancing its capabilities in deep directional and horizontal gas and oil drilling and will have 108 drilling rigs and 72 well service rigs at the end of the construction program. Nearly half of the fleet (46 rigs) consists of hybrid drilling rigs, designed to accommodate both coiled tubing and conventional, jointed, Range 3 pipe with automated pipe-handling equipment and top drives (Fig. 2).

Savanna drilled 4,586 wells with its hybrid rigs in 2007, dominating the sub 2,000-m market in Canada.6 Savanna’s market share increased to about 25% of all Canadian wells drilled in mid-2007, up from 16% in mid-2005.

Trailblazer Drilling, one of Savanna’s subsidiaries, designed the hybrid rigs in 2002, and the hybrid fleet now consists of:

  • 38 first-generation rigs (CT1500), capable of drilling to 1,500 m with 27/8-in. coiled tubing or 1,200 m with 31/2-in. drill pipe.
  • 8 second-generation rigs (CT2200), capable of drilling to 2,200 m with 31/2-in. coiled tubing or drill pipe.

Precision Drilling is building 19 Super Series rigs in its 2008 build program, with long-term contracts for all. The company has the capacity to manufacture 8 rigs/quarter.

Operators drilling

According to Nickle’s Rig Locator on Oct. 15 (www.nickles.com/rig), the five busiest operators drilling in Canada were:

  • Husky Energy Inc., 32 rigs.
  • EnCana Corp., 32 rigs.
  • Talisman Energy Inc., 25 rigs.
  • ConocoPhillips Canada Ltd., 20 rigs.
  • Canadian Natural Resources Ltd., 19 rigs.

Western Canada

Most Canadian drilling is in the Western Canada Sedimentary basin, predominantly Alberta and British Columbia.

According to Nickle’s Rig Locator Drilling Summary, companies have drilled and completed 15,715 wells in western and northern Canada during January-September 2008, down slightly from the same period in 2007. Industry reported 1,181 wells completed in August 2008, down 17% from a year earlier.

The western Canadian drilling fleet had an average 846 rigs available to work in the first three quarters of 2008, down slightly from 866 rigs last year, and has operated at 46% average utilization, up from 42% utilization in 2007.

Based on weekly surveys, Nickle’s reported that an average of 394 rigs were active between January and the end of September, up 8% from 365 rigs active a year earlier.

Rig counts were higher in every province except Alberta, which suffered only a 1% decline to an average of 263 rigs working, down from 265.

Saskatchewan kept an average of 63 rigs working, up 37% from last year (46 rigs).

British Columbia kept 61 rigs working, on average, up 22% from last year (50 rigs).

Manitoba oil drilling kept six rigs working this year, up 50% from the four rigs working last year.

On Aug. 12, 2008, the Canadian Association of Oilwell Drilling Contractors forecast that 18,087 wells would be drilled this year in western Canada, down about 5.5% from 19,144 wells drilled in 2007. This revision is a 28% improvement over the dismal 2008 forecast issued in October 2007.

CAODC attributed the positive revision to “increasing activity based on renewed strength in commodity prices and positive drilling results, particularly in the high profile [shale] plays in Saskatchewan (Bakken) and British Columbia (Montney).”

CAODC also predicted that the size of the western Canadian drilling fleet would decrease to 885 rigs by yearend 2008 and that rig utilization in 2008 would increase to 42%, up from 38% in 2007.

Historically, the average Canadian rig utilization over the past 4 years has been 59%:

  • 43% in 2007.
  • 64% in 2006.
  • 64% in 2005.
  • 63% in 2004.
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The fleet usually reaches peak utilization in February (Fig. 3).

In February 2008, utilization was only 76%, slightly down from 77% a year earlier.

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The drilling success rate in western Canada dropped significantly in the first 8 months of 2007 as the percentage of dry holes nearly doubled, increasing to 9.7% from 4.9% in 2007 (Fig. 4).

The percentage of oil drilling, relative to gas drilling, has been increasing since 2004. There were 6,114 gas wells and 3,332 oil wells drilled in the first 8 months of 2008, about 1.8 gas wells/oil wells (Fig. 4). This compares with previous years:

  • 2.4 gas/oil wells in 2007.
  • 2.7 gas/oil wells in 2006.
  • 3.2 gas/oil wells in 2005.
  • 3.5 gas/oil wells in 2004.

This 5-year downward trend can be attributed to the overall rise in world oil prices relative to Canadian gas prices. There is no energy parity; natural gas price increases have not kept pace with oil prices and gas subsequently trades at a substantial discount to oil in terms of its energy value.

Canadian Beaufort

On June 6, the Minister of Indian Affairs and Northern Development gave notice of the bids selected after the 2008 Beaufort Sea/Mackenzie Delta Call for Bids closed on June 2.7

BP Exploration Co. Ltd. bid $1.17 billion (Can.) and won three offshore exploration licenses in the Canadian Beaufort Sea: EL449, EL 451, and EL453. The company was already a large landholder in the Canadian arctic through its acquisition of Amoco Canada Petroleum Co. in 1998.

MGM Energy Corp. and Devon Energy Corp. paid $5.5 million (Can.) for EL450, a 41,000 hectare parcel in the Tulita region of the Northwest Territories, southeast of Norman Wells.

ConocoPhillips Canada Resources Corp. won EL452 with a bid of $2.54 million (Can.). This 196,000 hectare parcel abuts the southern edge of the three BP licenses.

The new license holders must drill wells within 5 years in order to hold the blocks for an additional 4 years.

Off Newfoundland

The Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB) released its 2007-08 annual report on June 4, 2008, detailing activities in the province.

C-NLOPB issues land rights in the form of exploration licenses (EL); significant discovery licenses (SDL), and production licenses (PL). As of Mar. 31, 2008, in the Newfoundland and Labrador Offshore Area, there were:

  • 37 ELs with total work commitments in excess of $731 million (Can.).

This includes one new EL (1105) issued in January 2008 to Corridor Resources Inc. for a work expenditure bid of $1,521,000 (Can.).

  • 48 SDLs.
  • 8 PLs, including two new PLs.

The Board also issued 20 operating licenses for offshore activity during the reporting year.

C-NLOPB reviewed applications to drill three delineation, six development, and three exploration wells in 2007-08:

  • ExxonMobil plans to drill a second well in the Orphan basin in 2009, following the Great Barasway F-66 exploration well drilled in 2007.
  • Shoal Point Energy drilled an onshore to offshore well on EL 1070 near the abandoned Shoal Point K-39 location.
  • A consortium of StatoilHydro, Husky Energy Inc., and Petro-Canada announced plans to bring Transocean’s Henry Goodrich semisubmersible drilling rig back to the Grand Banks areas in mid-2008 to embark on a multi-well drilling program that will last 2 to 21/2 years. The rig is under contract from June 2007 to July 2010 for $358,000/day, according to Transocean’s fleet status reports.

The consortium said it would drill the Mizzen exploration well in EL 1049 (Flemish Pass basin, 1,100 m water depth) to kick off the program, followed by exploration wells on the Primrose and North Mara prospects, further delineation of the West Avalon Pool at White Rose, and two development wells in the Terra Nova field.

On Aug. 9, The Henry Goodrich spud the North Amethyst E-17 well, drilled to 2,964 m, and was logging at the end of September, according to C-NLOPB’s weekly public status reports.

Transocean’s GSF Grand Banks semisub is also working in Atlantic Canada, under contract to Husky from January 2008-February 2011 for $353,000/day (US). On Sept. 13, it spud (reentered) the E-18 9 well at White Rose, according to C-NLOPB.

Western Newfoundland

Tekol and Gas Corp. plan to drill an onshore to offshore exploration well near Lark Harbour, Western Newfoundland, C-NLOPB reported in its 2007-08 annual report.

On Feb. 28, Vulcan Minerals Inc. announced that it was transferring interests in petroleum permits onshore the Bay St. George basin in western Newfoundland to Investcan Energy Corp.8

Off Nova Scotia

The Canada-Nova Scotia Offshore Petroleum Board (CNSOPB) issued its 2007-08 annual report on July 30. There has been no drilling off Nova Scotia in 2008.

On Sept. 15, CNSOPB announced it has issued two 9-year exploration licenses off Sable Island. CNSOPB issued Exploration Licenses 2417 and 2418 to Ammonite Corp. and Catheart Energy Inc., after having announced the companies as successful bidders on July 10 under Call for Bids NS07-1.

Earlier this month, at the Canadian Offshore Resources Exhibition in Halifax, two operators discussed plans to drill off Nova Scotia in 2009, subject to rig availability. Canadian Superior Energy Inc. Pres. Mike Coolen said the company intends to drill on its shallow-water Mariner block near Sable Island in fall 2009 and may use a rig from Rowan Cos. Ian Padden, project manager at Bass Enterprises Production Co., told conference delegates that BEP hopes to drill a deepwater prospect in October or November 2009. The Ma Cherie prospect is about 200 km southwest of Halifax.

The Deep Panuke offshore gas development project is under development about 250 km southeast of Halifax. It’s operated by EnCana Corp. and partners and will produce first gas in 2010.

In January 2008, EnCana carried out a geophysical survey along the proposed pipeline route using M/V Anticosti.

In September, Joint Oil of Libya and Tunisia announced a swap agreement that gives it an overriding royalty interest and optional participating interest in Canadian Superior’s Mariner block off Nova Scotia (OGJ, Sept. 15, 2008, p. 50). Canadian Superior receives a 7-year exploration license for the 7th of November block, 75 miles offshore in the southern Mediterranean.

Onshore Nova Scotia

Triangle Petroleum Corp. is exploring for shale gas in the Maritimes basin (OGJ, Oct. 22, 2007, p. 50) and has drilled two vertical wells (45% working interest) in the 516,000-acre Windsor block in its 2008 drilling program.9

Using Nabors Rig 4, Triangle drilled the N-14-A well in July to 8,500 ft and encountered Horton Bluff shale at 3,600 ft, but noted more gas between 4,200-8,200 ft.

The company spud the second well, the O-61-C in August, in a separate fault block about 14 miles west of the first well. The planned TD is 9,900 ft.

In July, Calgary’s Forent Energy Ltd. announced it obtained exploration rights to the 466,000-acre Beechhill block near Antigonish, NS (OGJ Online, July 16, 2008). Forent has a 3-year license with an option to renew, and plans to explore for conventional and unconventional resources.

New Brunswick

Halifax-based Corridor Resources plans to drill three widely spaced vertical wells based on 2D seismic, followed by a horizontal well in the Mississippian Frederick Brook shale near Elgin, NB (OGJ, June 16, 2008, p. 39). The $32 million program includes the acquisition of a 65 sq km grid of 3D seismic.

Corridor also plans a $14.4 million program to drill several horizontal wells in Hiram Brook sands.

In August, Calgary’s PetroWorth Resources Inc. reported the results of two wells drilled into the Hiram Brook sandstone in eastern New Brunswick (OGJ Online, Aug. 7, 2008). Gas flowed at 1.058 MMcfd from the E-08 (Feenan-2) well, commingled from four zones. The Hiram Brook section in the Feenan-4 well was extremely hard and metamorphosed, and Petroworth said it would drill elsewhere on its 40,846-acre Rosevale license.

Triangle Petroleum has a 70% working interest on 68,000 gross acres in New Brunswick.

Canadian R&D

StatoilHydro is supporting Canadian heavy oil research and bolstering its heavy oil portfolio.

In June 2007, Statoil ASA, through subsidiary Statoil Canada Ltd., acquired North American Oil Sands Corp. for about $2.2 billion (Can.), with access to 257,200 acres in the Athabasca region of Alberta.10

StatoilHydro expects first production from the Leismer demonstration project in late 2009-early 2010, reaching a capacity of 10,000 b/d of bitumen. The production will come from 22 horizontal well pairs drilled from 4 pads.

In July 2008, a StatoilHydro ASA executive said crude prices need to be at least $70/bbl to cover capital and operating expenses and provide an acceptable rate of return from producing Canadian oil sand deposits.

Other mergers

Calgary’s Zedi Inc. announced on Sept. 24 that it signed a letter of intent to acquire Calgary-based, privately held OAS Oil field Accounting Service Ltd. through its wholly owned subsidiary, Zedi Canada Inc. for $6.235 million (Can.).

Zedi is Canada’s leading digital gas measurement firm. OAS provides chart reading and integration services to the oil and gas industry, with 25,000 wells under surveillance. The transaction will close Oct. 31, 2008.

Drilling ahead

Drilling is likely to decrease in the near future, due to changes in Alberta’s taxation, low natural gas prices, reduced share values, and resulting higher spread rates for loans to fund operations.

Reduced access to capital will probably cause a drop in capital budgets, especially at junior producing companies.11 Peters & Co. Ltd.’s PE Junior Producers Index (Fig. 4) dropped 50% in September, to about 7,000 from nearly 15,000 points.

The energy sector announced 79 merger and acquisition deals worth $6.3 billion (Can.) in first-half 2008, compared with 110 deals worth $23.8 billion (Can.) in first-half 2007, a 72% drop, according to Sayer Energy Advisors.12

More mergers may be ahead. Smaller companies without proved, developed, producing reserves may be unable to find financing as lenders get more selective and equity markets dry up, pushing them into mergers or into selling working interests in prospects.

On the upside, new and improved rigs and equipment will deliver more cost-effective results in the field, where it may be a buyer’s market.

References

  1. Canadian Energy Market Analysis, Energy Business Reports, http://energybusinessreports.com.
  2. “Natural Gas Rebound Sustains Activity,” Petroleum Services Association of Canada, July 25, 2008, www.psac.ca.
  3. “Natural Gas Activity on the Rebound,” PSAC, Apr. 23, 2008.
  4. www.psac.ca/statistics/ser_index_co.html.
  5. “Savanna Energy acquires drilling rigs in the US,” June 16, 2008, www.savannaenergy.com.
  6. August 2008 corporate update, Savanna Energy Services Corp., www.savannaenergy.com/docs/presentations/savanna%20-%20august%202008.pdf.
  7. Results of the 2008 Call for Bids: Beaufort Sea and Mackenzie Delta, Indian and Northern Affairs Canada, www.ainc-inac.gc.ca/oil/act/Cal/beau2008//winbid/06_08_e.html.
  8. “$1,000,000 financing announced,” Vulcan Minerals news, www.vulcanminerals.ca, April 2008.
  9. “Triangle Petroleum Provides Update on Its Maritimes Shale Program,” Marketwire news, Aug. 28, 2008.
  10. Cattaneo, Claudia, “Statoil can teach us a lesson,” Financial Post, May 1, 2007, www.financialpost.com.
  11. Mahony, James, “US Credit Crisis Choking Off Access To Capital,” Nickle’s Daily Oil Bulletin, Sept. 29, 2008, www.nickles.com.
  12. Olijnyk, Zena, “Energy M&As are beginning to heat up,” National Post, Aug. 30, 2008, www.sayeradvisors.com.