Activity Forecast
January 2008 Dialing it down
Most people see weakening activity levels in the gas-conscious Western Canadian Sedimentary Basin in 2008, as oil prices stay high, gas prices remain depressed, and winter weather continues to be a non-factor.
As the oil and gas industry sails into 2008, it will be under pressure to change the way it works in the face of an increasingly complex operating climate—royalty hikes, environmental pressures, labor constraints, infrastructure renewal and capital availability issues, commodity pricing, and a strong Canadian dollar.
Paying attention to industry forecasts—and there are no shortage of those—can play a role, but a key ingredient to successfully riding out an increasingly volatile working environment, is incorporating proactive thinking into long-term project plans. It is clear that the entire energy market is in the midst of significant upheaval.
The Petroleum Services Association of Canada, in its benchmark drilling activity forecast for 2008, is projecting a continued and dramatic slowdown in petroleum industry field activity this year. A certain degree of activity erosion flowing from Alberta’s new royalty regime has impacted the market. While producers and the industry as a whole are still calculating the impacts of the new royalty regime, all indicators are for some negative impacts, which we have taken into account in further reducing 2008 forecast—which were already low due to low natural gas prices. On a provincial basis, PSAC estimates 9,575 wells will be drilled in Alberta in 2008, representing a 25 per cent decrease over 2007. However, drilling activity in the three other western provinces is expected to increase in 2008 over 2007. In British Columbia, drilled wells will be up by 10 per cent to 900 wells, while Saskatchewan and Manitoba can each expect to see a 3 per cent improvement to 3,600 completions and 350 completions, respectively.
The Canadian Association of Oilwell Drilling Contractors’ forecast mirrors that of PSAC. CAODC is also expecting a dramatic reduction in field activity in 2008 under the pressure of continued weak natural gas prices, high operational costs, and a very strong Canadian dollar. Assuming no material change in average well depths (7.4 drilling days per well), CAODC expects 13,735 wells will be drilled in 2008. Fleet utilization will come in at just 34 per cent in 2008, according the CAODC. This is well below the average annual utilization level of 50 per cent. Importantly, the association expects first-quarter activity to only reach a utilization level of 50 per cent. “The winter drilling season, normally the busiest time for drilling and service activity, has been lost due to the uncertainty created by the Alberta royalty review,” the CAODC says. “An average of 445 rigs out of a fleet of 890 will be drilling. The last time utilization was at, or lower than, this level was 1992.
The natural gas inventory situation appears in danger of reaching full storage similar to 2006, dimming the prospects of a turnaround in natural gas prices. Most weather forecasts are suggesting that this winter will be two per cent warmer than average, which won’t help generate higher demand, while rising liquefied natural gas (LNG) imports will keep supply concerns in check. LNG imports in the U.S. climbed 44 per cent in 2007, offsetting lower Canadian production. Without a cold winter, natural gas is expected to continue floundering at current levels in the range of sub-$5 to $6-plus per thousand cubic feet throughout 2008. Another crucial variable [to a natural gas price recovery] is the drilling complexion in the United States. To date, U.S. drilling hasn’t really come off. In fact, gas production is still increasing in the United States. An immense amount of activity is taking place south of the border, where the focus has been on unconventional basins in the Rockies and Texas. The reason for the robust activity is the difference in economics between conventional and unconventional basins. You have a break-even price of about $9 on conventional gas and about $7 on unconventional. In the United States, they’re chasing a lot more unconventional gas and in Canada, we are chasing more conventional gas.
