Canadian industry cautiously optimistic about drilling rebound this year

Jim Stott
Special Correspondent-Calgary

CALGARY, May 20 -- Industry spokesmen are cautiously optimistic that Canadian oil industry performance this year may improve on earlier forecasts of substantially reduced activity.

They cite factors such as stronger commodity prices, a reviving North American economy, underlying growth in demand for natural gas and adherence by the Organization of Petroleum Exporting Countries and other oil exporters to oil quotas.

However, industry groups are not yet ready to revise estimates of drilling activity and capital spending in Canada.

CAPP View

Greg Stringham, vice-president of the Canadian Association of Petroleum Producers (CAPP), says the association is sticking for now with its estimate of 15,000 wells for 2002—a higher estimate than most analysts—compared with the record total of 18,137 wells in 2001.

"We are still reasonably optimistic, and prices over the past month have given a little more credence to that. Natural gas is still quite a hot prospect, even though cash flows are lower than last year," Stringham said.

"We notice companies taking these cash flows and moving them disproportionately towards the gas side of the business. There's the strong interest on the part of some US companies, which came in and made acquisitions with the full intent to continue on their fairly strong budgets for natural gas."

CAPP is forecasting a decline of about 20% in capital spending this year over 2001, to about $23 billion (Can.) from $27 billion. It expects the biggest swing will be in the Western Canada Sedimentary Basin, with oil sands spending about the same at $5 billion, and small declines in spending for the East Coast and Arctic regions. Stringham notes that the next major East Coast spending will be on the White Rose oil field project off Newfoundland and the Deep Panuke gas field off Nova Scotia.

Stringham says he expects rig utilization rates to be up over the remainder of the year as additional cash flow that companies are now receiving is turned into exploration dollars in upcoming budgets.

The CAPP executive also expects an improvement in land sales. He notes an Apr.1 land sale in British Columbia was the province's second highest on record at $60 million. Companies spent heavily on the Ladyfern area in northeastern British Columbia, location of major gas discoveries, and where there are unconfirmed reports of more discoveries. The largest British Columbia sale raised $125 million in 2001.

Stringham says recent events in the Middle East are responsible for some of the run-up in crude prices, but the situation is uncertain and an improving economy is the best hope for strong prices.

"What you can bank on is the economic recovery, and at least we have bottomed out of the recession. The economy seems to have turned the corner," Stringham said. "Tat will provide more demand,and OPEC [members are] adhering 85% to their quotas. So are Russia, Mexico, and Norway. I think we will stay in the OPEC price range of $22-28/bbl. And we can drill a good number of wells with that cash flow."

Drilling forecast unchanged

Roger Soucy, president of the Petroleum Services Association of Canada, (PSAC), says the association in not ready to change its drilling forecast of 13,386 wells for western Canada, down 4,638 wells from 2001.

"I don't know where it's going to go. I suspect the oil companies will take the better part of the second quarter to convince themselves that commodity prices will, in fact, be higher than they anticipated last fall and allow cash flow to build up for new programs they wouldn't have done otherwise," Soucy says.

"We expect in the second half of the third quarter and into the fourth quarter to start seeing benefits of any sustained price increase in commodities."

Soucy says the industry is going into the spring with higher natural gas storage levels than the historic averages, and the question is what will hold the price up when the cold weather is gone. He says the industry will be going into the heating season next winter with more gas in storage than there has been in several years.

The PSAC executive says the fact that the industry is working hard just to keep up with gas depletion rates should be a factor in the equation.

Soucy says that, despite a downturn in drilling, there has been a real hesitation in companies to lay off workers. He estimates layoffs at about 10%.

"The skilled-labor situation is such that there isn't any left, and you have to spend time and money building [a work force]. You hate to let them go," Soucy says.

Soucy says a forecast of 13,000-14,000 wells is still well above the 10-year average of 11,000, and "if you are going to starve to death, you probably should be doing something else."

Saj Shapiro, a spokesman for the Canadian Association of Oilwell Drilling Contractors, says his association is forecasting 13,600 wells, but the industry is starting to see an economic rebound earlier than most analysts expected.

"We could see a rebound [in drilling] by the fourth quarter or the first quarter 2003," he said.

Gas outlook

Shapiro is confident about the longer term for natural gas demand. He says that because of rising depletion rates, demand was barely met last year and the year before. He says that if economic activity keeps moving up, demand will keep on increasing, and activity will be "all-out."

Hank Swartout, president and CEO of Calgary-based Precision Drilling Corp., says he is not sure what will happen in the second and third quarters but that weather and gas storage will be key elements.

"We're probably going to exit the 2001-02 drilling season with the highest storage we've seen in the past 7-10 years. Storage became pregnant this winter," Swartout said.

"This summer, when people are trying to sell gas, there [will be] no place to put it. The spot market could be cramped substantially until we see recovery in the US economy, and people start switching back to blended crudes they've gone to over time."

The CEO of Precision, Canada's largest drilling company, also says the industry may pay a price this summer because companies built rigs without contracts and will run units virtually at cost to keep jobs.