Canadian drilling forecast drops in 2003

The expected number of Canadian oil and gas wells drilled this year will fall by 17 % but rise again in 2003 as higher oil revenues boost capital spending budgets, the oilpatch services industry predicted. Roger Soucy, president of the Petroleum Services Association of Canada, said the drop in drilling to 15,100 wells reflected a 33 % slash in capital spending by energy companies this year.
But higher crude oil prices in the last several months should send profits soaring at Canada's biggest oil producers -- and that should translate into more exploration and a 10 % increase in drilling for 2003, said Soucy. "Oil prices this year are much higher than people had forecast, so companies are sitting on a fair amount of cash right now," Soucy told. "And we're assuming that a certain amount of that is going to be released next year."

The industry's capital spending should rise to $ 7 bn next year, up from $ 6 bn this year but still down from the record $ 9 bn in 2001. Forecasts by the services association -- which represents more than 260 companies including Canada's largest well driller, Precision Drilling -- are an important bellwether on how the energy sector is expected to perform in the next year.
Of the estimated 16,500 wells to be drilled next year, about 75 % will be in Alberta, 20 % in Saskatchewan and only 5 % in British Columbia, where natural gas production near Fort St. John has become a key engine of the province's economic growth. It is expected that 62 % of the wells will be natural gas, with just 27 % oil and a further 10 % other types of drilling.

The industry also expects a rise in natural gas prices to an average of $ 4.75 per thousand cf over the year while oil prices are expected to come off substantially from current levels to $ 24.25 US per barrel. The oil price estimates reflect the cost of crude without the $ 5-$ 6 US "war premium" currently tacked on each barrel due to the volatility in the Middle East and the prospects of a US-led military conflict with Iraq.
Other volatility that could affect oil and gas drilling in Canada is effects of Ottawa's planned ratification of the Kyoto emissions control treaty. But because no details are yet known on what specific effects it will have on the industry, Kyoto was not factored into the forecasts, said Soucy.

Two large mergers this year -- including the creation of EnCana by melding PanCanadian Energy and Alberta Energy, as well as Canadian Natural Resources' acquisition of Rio Alto Exploration -- also cut down drilling activity. "Inevitably, when two companies merge, the end-merged company does less than the two did individually," said Soucy.
"I haven't seen one case where the merger of two companies ended up with more work being done in the field," he said.

The increasing presence of royalty trusts, which have tended to buy companies with producing wells and then distribute the majority of their cash flow to unit holders rather than spend it on exploration, also had a negative effect on drilling.
But Soucy said that since most of the "low hanging fruit, the easy-buyouts" have been taken by the trusts, they will be forced to do some development drilling on their properties. "On a longer term basis, we might end up with even a positive situation where the trusts have a stabilizing effect because they don't necessarily drill-up their properties as quickly as oil companies would because the nature of the way they pay out."