9% Increase in Oil, Gas Drilling In Canada for 2003

Abstract: The Petroleum Services Association of Canada has released an upbeat forecast for drilling next year in Canada. It expects 16,500 wells will be punched down in 2003, up from 15,100 expected this year and 30 percent higher than the total averaged over the past decade.

Analysis:Canadian service companies received badly needed good news this week with an upbeat forecast for 2003 drilling activity.

The Petroleum Services Association of Canada's (PASAC's) announcement that oil and gas drilling should jump nine percent next year is as welcome as a flashlight during a power outage.

The lobby association, which represents more than 260 private and public service firms, expects 16,500 wells will be drilled in 2003, up from the 15,100 forecast for this year. While the 2003 total falls short of the peak of almost 18,200 holes in 2001, the anticipated total will be 30 percent higher than the annual count of 12,650 averaged over the past decade.

The optimistic forecast served as a cheerful antidote this week's drilling survey, which found 273 rigs in the field in Western Canada. Current utilization of about 41 percent of the fleet compares with 49 percent at the same point last year.

Gas is expected to account for 62.3 percent of all wells drilled next year, up marginally from the 61.6 percent share anticipated for 2002. Oil is forecast to take 27.3 percent of drilling next year, a slight decline from this year's level. The remaining 10 percent falls into the miscellaneous category that includes dry holes and service wells.

PSAC's numbers for 2003 are based on WTI averaging $24.25 per barrel and gas fetching C$4.75 per thousand cubic feet (mcf) at the AECO trading hub in southern Alberta.

Several brokerages are predicting gas will average C$4 per mcf in Alberta this year. PSAC is counting on economic recovery in the U.S. and rising decline rates for the 19 percent jump in prices anticipated for 2003.

The stronger prices explain PSAC's expectations of increased shallow gas drilling as well as more activity in the bigger and deeper plays found along the Rocky Mountain foothills in Alberta and in northeast British Columbia. These plays are particularly important to the sector since they need more services, and for longer, than the gopher-like holes punched down by shallow gas developers in southeastern Alberta and southwestern Saskatchewan.

The anticipated increase in elephant hunting will help drive capital spending to C$7 billion in 2003, up from the C$6 billion expected in 2002. A record C$9 billion was pulled out of corporate wallets in 2001.

Broken down by region, PSAC's figures show Alberta will continue to take in the majority of activity. The province is expected to account for 12,350 wells in 2003, compared with 11,210 this year. Although Saskatchewan recently revamped its fiscal regime to encourage more activity, it is forecast to be home to 3,150 wells next year versus 3,050 in 2002. British Columbia is predicted to see the biggest percentage jump (27 percent) as its well total is pegged at 805 next year, compared with 635 in 2002. B.C.'s bigger role is partially a reflection of Alberta's increasing maturity when it comes to finding both conventional oil and gas, PSAC officials said this week when unveiling their numbers. Results from TransCanada PipeLines Ltd. certainly back up their statements. The firm's numbers showed field receipts on Alberta's major pipeline system fell to 11.3 billion cubic feet per day in the first nine months, down from 11.5 billion in the same period a year ago.

Ladyfern, a large gas field discovered in early 2000 in B.C., is also attracting the attention of producers looking for big finds, said Bill Lingard, chief operating officer for the Canadian arm of Nabors Industries Inc. and PSAC's past chairman.

He does not believe Ladyfern's rapid decline, with daily production expected to plunge to 300 million cubic feet by the end of December from about 650 million in the second quarter, will scare explorers away from B.C.

"They still will be aggressive because it (Ladyfern) is obviously is a very prolific formation, and you can get the hydrocarbons out quickly if commodity prices are where you're going to make good returns on your investment. I think people will definitely chase more Ladyfern-type plays," he said.

The federal government's vague plans to implement the Kyoto Protocol to reduce greenhouse gases in Canada were ignored by PSAC when crunching the numbers for the forecast. The controversial move, opposed by petroleum-rich provinces like B.C. and Alberta, is still too far down the road to have an effect in 2003.

Roger Soucy, PSAC's president, said, "16,500 wells is probably the fourth highest number of wells. As importantly, capital expenditures will be up there as well, probably the third or fourth highest ever. It should be a pretty solid year."

A solid 2003 is something service firms need after this year's slump in drilling. Many firms are expected to post ugly third-quarter figures because of the downturn. Enerflex Systems Ltd., for example, reported third-quarter profits dropped 57% despite a C$180 acquisition of EnSource Energy Services over the summer. Enerflex's earnings fell to C$2.9 million from C$6.7 million in the third quarter of 2001.

The drop in drilling, despite commodity prices substantially higher than expected at the start of the year, continues to puzzle many people, including PSAC's top officials. They said consolidation, a reluctance by producers to expand capital budgets (instead concentrating on reducing debt), and time needed for prospect evaluation by juniors who have acquired assets from larger firms rationalizing their properties are possible reasons for the decline in drilling, the economic lifeblood of service firms. Some analysts have fingered risk-adverse royalty trusts, which are growing almost every day in size and importance in the Canadian oilpatch, for the reduction in tripping and fishing in 2002. But Soucy said the sector could add stability to the traditionally volatile Canadian drilling industry in 2003 and following years.

"Now that all the low-hanging fruit has been taken by the trusts, eventually they are going to have at least to do some development drilling on their properties to maintain their production," he said. "On a longer-term basis, we may end up with a positive situation where the trusts have a stabilizing effect. They don't necessarily drill up their properties as quickly as oil companies would because of the nature of their flat-line payout to their subscribers, and so there isn't as big a rush for them to drill up everything."

It's only a theory right now, one that will be tested in 2003. It should make for an interesting review in another 12 months.