Gas drilling expected to keep falling in oilsands activity to grow
[2008-3-27]
Natural gas producers and drillers, whose field activity plummeted this year probably won't be seeing much relief in 2008, while action in the oilsands is expected to intensify thanks to record-high crude oil prices.
The bottoming out of North American natural gas markets coupled with the soaring loonie made for an "unpleasant and difficult" year, said Don Herring, president of the Canadian Association of Oilwell Drilling Contractors, adding that in 2008 "the story continues to worsen."
Herring's group predicts a huge drop in drilling in 2008. The industry drilled 6,000 fewer wells this year than in did in 2006 and next year it expects to see that figure drop by about another 2,560 - a 38 per cent drop within two years.
The Petroleum Services Association of Canada also released dismal predictions for 2008. That group forecasts drilling to go down by 17 per cent between 2007 and 2008.
Natural gas prices hit record highs in the fall of 2005, a particularly bad hurricane season for the U.S. Gulf Coast, which hosts a number of major gaswells and gathering pipelines. But since then, North America has experienced two warm winters and one tame hurricane season, leading to a big supply surplus.
In addition, the expansion of liquefied natural gas projects has created a global market for LNG, which would freeze and liquefy gas produced in Russia, the Middle East and South America and ship it by tanker to North American markets, where it would be regassified and used to boost supplies to consumers, businesses and power plants.
The average price of natural gas in North America was about $6.50 per thousand cubic feet this year.
"A large number of potential wells are uneconomic at that price. Really to make gas economic again in Canada, we need prices north of $8." said PSAC president Roger Soucy.
"There's a lot of gas in North America right now as a result of some warm winters and we don't expect that we're going to come out of this heating season next March with a whole lot changed."
It has been a different story in Alberta's oilsands where businesses there have been reaping the benefits of record-high crude oil prices. Oil started off the year at around the US$60 a barrel mark and came close to US$100 before losing ground on concerns about the impact a U.S. recession would have on global oil demand.
A number of Canadian energy giants - like EnCana Corp. (TSX:ECA), Petro-Canada (TSX:PCA) and Husky Energy Inc.(TSX:HSE) - have outlined plans to expand their oilsands operations in their 2008 capital spending plans.
International producers have also been looking to increase their stake in the vast Athabasca oilsands in northern Alberta, which are believed to contain 175 billion barrels of oil - second only to Saudi Arabia's reserves.
At the beginning of the year, EnCana inked a $15-billion deal with Houston-based giant ConocoPhillips. Under that deal, EnCana would gain 50 per cent of two ConocoPhillips (NYSE:COP) refineries while the U.S. company would have a half stake in EnCana's Foster Creek and Christina Lake oilsands projects.
Earlier this month Husky Energy reached a similar deal with Britain's BP Plc worth $5.5 billion. Each company gets a 50 per cent stake in Husky's Sunrise oilsands project and BP's Toledo refinery.
State-owned players like Norway's Statoil, China's Sinopec and France's Total have bought into the oilsands and Japanese, Korean and Italian players are thought to be next.
In November, the National Energy Board said it expected oilsands production to grow to 2.8 million barrels a day by 2015 - 200,000 barrels less than it predicted a year earlier. The predicted shortfall is due to escalating costs on a number of oilsands mega projects.
"The oilsands growth has continued, but it's been moderated. We are seeing more phasing than we had expected," said Pierre Alvarez, president of the Canadian Association of Petroleum Producers.
"The growth continues to be in the oilsands, which is good because when you look at the global world oil supply, which is growing increasingly under the control of a smaller number of state-owned companies ... North America needs to have replacement for those barrels and clearly the oilsands can play an important part of that," he said.
In 2007 the energy trust sector also saw a lot of upheaval, which is expected to continue well into next year, said Bissett Income Fund analyst Les Stelmach.
On Oct. 31, 2006 Finance Minister Jim Flaherty announced the federal government would be slapping a new 31.5 per cent tax on income trusts come 2011.
In preparation for the change, a number of trusts have been merging with one another because larger companies will be better equipped to pursue growth projects under the new rules, Stelmach said.
Enerplus Resources Fund's recent acquisition of Focus Energy Trust the latest example, and Stelmach said he expects that trend to continue in 2008.
"I certainly wouldn't be shocked to see more in terms of (merger and acquisition) activity," he said, adding he anticipates a number of the larger trusts will begin "picking off" some of their junior counterparts.
In addition to the looming income trust tax, the industry has also been grappling with the outcome of the Alberta Royalty Review. As a result, a number of majors have trimmed their planned 2008 spending in the province.
In September a government-appointed panel found Albertans had been missing out on $2 billion in oil and gas royalties. On Oct. 25, Premier Ed Stelmach adopted some of the panel's recommendations, hiking royalties instead by $1.4 billion.
"I think we're already seeing a dramatic reduction in the amount of conventional oil and gas wells being drilled as companies look at the long-term economics of the changes," said CAPP's Alvarez.
"Clearly the regime has been substantially changed. I think companies as a result are reducing the expenditures that are here."
At the end of November, Canadian Natural Resources Ltd. (TSX:CNQ) slashed its capital spending for 2008 by third, citing the new Alberta royalty regime as the main factor. The company said it would cut its natural gas drilling in Alberta by 44 per cent.
International oil producer Nexen Inc. (TSX:NXY) said it planned to cut its spending on capital projects for 2008 by $1.2 billion compared to the 2007 capital expenditures and also partly blamed the royalty change.
EnCana said this week it would raise its overall capital spending by 13 per cent, but that $500 million that would have gone to Alberta would be invested elsewhere, partly due to the new royalty framework.
Canadian drivers can also expect to see some changes this year when it comes to prices at the pump. So far the skyrocketing crude prices haven't had much of an impact thanks to the high Canadian dollar and low margins from refiners who turn oil into gasoline.
But in the springtime when there's a higher demand for gasoline, refining margins will go up. If crude stays in the US$90 a barrel range until then - and many predict it will - drivers will be in for a nasty spring.
"Then we could see record gasoline prices as the full impact of both record-high crude prices and high refiner margins both kick in at the same time," said Michael Ervin, an analyst with consulting firm M.J. Ervin and Associates.
The bottoming out of North American natural gas markets coupled with the soaring loonie made for an "unpleasant and difficult" year, said Don Herring, president of the Canadian Association of Oilwell Drilling Contractors, adding that in 2008 "the story continues to worsen."
Herring's group predicts a huge drop in drilling in 2008. The industry drilled 6,000 fewer wells this year than in did in 2006 and next year it expects to see that figure drop by about another 2,560 - a 38 per cent drop within two years.
The Petroleum Services Association of Canada also released dismal predictions for 2008. That group forecasts drilling to go down by 17 per cent between 2007 and 2008.
Natural gas prices hit record highs in the fall of 2005, a particularly bad hurricane season for the U.S. Gulf Coast, which hosts a number of major gaswells and gathering pipelines. But since then, North America has experienced two warm winters and one tame hurricane season, leading to a big supply surplus.
In addition, the expansion of liquefied natural gas projects has created a global market for LNG, which would freeze and liquefy gas produced in Russia, the Middle East and South America and ship it by tanker to North American markets, where it would be regassified and used to boost supplies to consumers, businesses and power plants.
The average price of natural gas in North America was about $6.50 per thousand cubic feet this year.
"A large number of potential wells are uneconomic at that price. Really to make gas economic again in Canada, we need prices north of $8." said PSAC president Roger Soucy.
"There's a lot of gas in North America right now as a result of some warm winters and we don't expect that we're going to come out of this heating season next March with a whole lot changed."
It has been a different story in Alberta's oilsands where businesses there have been reaping the benefits of record-high crude oil prices. Oil started off the year at around the US$60 a barrel mark and came close to US$100 before losing ground on concerns about the impact a U.S. recession would have on global oil demand.
A number of Canadian energy giants - like EnCana Corp. (TSX:ECA), Petro-Canada (TSX:PCA) and Husky Energy Inc.(TSX:HSE) - have outlined plans to expand their oilsands operations in their 2008 capital spending plans.
International producers have also been looking to increase their stake in the vast Athabasca oilsands in northern Alberta, which are believed to contain 175 billion barrels of oil - second only to Saudi Arabia's reserves.
At the beginning of the year, EnCana inked a $15-billion deal with Houston-based giant ConocoPhillips. Under that deal, EnCana would gain 50 per cent of two ConocoPhillips (NYSE:COP) refineries while the U.S. company would have a half stake in EnCana's Foster Creek and Christina Lake oilsands projects.
Earlier this month Husky Energy reached a similar deal with Britain's BP Plc worth $5.5 billion. Each company gets a 50 per cent stake in Husky's Sunrise oilsands project and BP's Toledo refinery.
State-owned players like Norway's Statoil, China's Sinopec and France's Total have bought into the oilsands and Japanese, Korean and Italian players are thought to be next.
In November, the National Energy Board said it expected oilsands production to grow to 2.8 million barrels a day by 2015 - 200,000 barrels less than it predicted a year earlier. The predicted shortfall is due to escalating costs on a number of oilsands mega projects.
"The oilsands growth has continued, but it's been moderated. We are seeing more phasing than we had expected," said Pierre Alvarez, president of the Canadian Association of Petroleum Producers.
"The growth continues to be in the oilsands, which is good because when you look at the global world oil supply, which is growing increasingly under the control of a smaller number of state-owned companies ... North America needs to have replacement for those barrels and clearly the oilsands can play an important part of that," he said.
In 2007 the energy trust sector also saw a lot of upheaval, which is expected to continue well into next year, said Bissett Income Fund analyst Les Stelmach.
On Oct. 31, 2006 Finance Minister Jim Flaherty announced the federal government would be slapping a new 31.5 per cent tax on income trusts come 2011.
In preparation for the change, a number of trusts have been merging with one another because larger companies will be better equipped to pursue growth projects under the new rules, Stelmach said.
Enerplus Resources Fund's recent acquisition of Focus Energy Trust the latest example, and Stelmach said he expects that trend to continue in 2008.
"I certainly wouldn't be shocked to see more in terms of (merger and acquisition) activity," he said, adding he anticipates a number of the larger trusts will begin "picking off" some of their junior counterparts.
In addition to the looming income trust tax, the industry has also been grappling with the outcome of the Alberta Royalty Review. As a result, a number of majors have trimmed their planned 2008 spending in the province.
In September a government-appointed panel found Albertans had been missing out on $2 billion in oil and gas royalties. On Oct. 25, Premier Ed Stelmach adopted some of the panel's recommendations, hiking royalties instead by $1.4 billion.
"I think we're already seeing a dramatic reduction in the amount of conventional oil and gas wells being drilled as companies look at the long-term economics of the changes," said CAPP's Alvarez.
"Clearly the regime has been substantially changed. I think companies as a result are reducing the expenditures that are here."
At the end of November, Canadian Natural Resources Ltd. (TSX:CNQ) slashed its capital spending for 2008 by third, citing the new Alberta royalty regime as the main factor. The company said it would cut its natural gas drilling in Alberta by 44 per cent.
International oil producer Nexen Inc. (TSX:NXY) said it planned to cut its spending on capital projects for 2008 by $1.2 billion compared to the 2007 capital expenditures and also partly blamed the royalty change.
EnCana said this week it would raise its overall capital spending by 13 per cent, but that $500 million that would have gone to Alberta would be invested elsewhere, partly due to the new royalty framework.
Canadian drivers can also expect to see some changes this year when it comes to prices at the pump. So far the skyrocketing crude prices haven't had much of an impact thanks to the high Canadian dollar and low margins from refiners who turn oil into gasoline.
But in the springtime when there's a higher demand for gasoline, refining margins will go up. If crude stays in the US$90 a barrel range until then - and many predict it will - drivers will be in for a nasty spring.
"Then we could see record gasoline prices as the full impact of both record-high crude prices and high refiner margins both kick in at the same time," said Michael Ervin, an analyst with consulting firm M.J. Ervin and Associates.
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