US oil companies sell oil and gas properties in western Canada

Several US oil companies are selling oil and gas properties in western Canada, leading to speculation that the region has become a financial disappointment. Companies that have been operating for roughly the past 10 years in the oil and gas producing areas of western Canada -- mostly in Alberta -- are conceding that wells with rapidly declining production and rising operating costs are no longer financially feasible.
Among the companies pulling out are ConocoPhillips, Marathon Oil, Vintage Petroleum and Murphy Oil. Natural gas wells in western Canada are typically shallow and relatively easy to drill, but production declines rapidly, meaning operators have to drill furiously in the area to replace reserves. The area has been the largest oil and gas producing region of Canada for the past five decades.

In 2002, companies drilled 18,000 wells in western Canada. But even so, natural gas production in the region is projected to be down by 4 % this year. The National Energy Board of Canada estimates initial production from gas wells in the region is off by 45 % compared with 1995 levels.
"Many US companies have spent the last year or so reviewing their portfolios and deciding which ones don't have the economic return they are looking for," said Court Mackid, director of Canadian exploration and production services for Ziff Energy Group. "When prices are reasonably high, they sell them if they can."

Despite the flurry of properties on the market in western Canada and the maturing fields there, analysts and industry officials say western Canada will continue to be a major oil and gas producing region for many years to come. The Western Canada Sedimentary Basin is estimated to still hold 9 tcf of recoverable natural gas and possibly another 50 tcf of total gas reserves. But companies looking for fast growth prospects will be looking elsewhere.
"Canadian gas remains an important source of gas for North America, but companies with aggressive growth strategies are looking beyond North America," said David Bole, managing director of Randall & Dewey, a Houston company that markets oil and gas properties. Many of the properties on the market in western Canada are being picked up by royalty trusts, investment groups that buy the properties, exploit them and distribute the majority of the proceeds to their unit holders without reinvesting into new drilling.

Murphy Oil recently announced a small deal to sell various interests in Canadian oil and natural gas properties for about $ 35 mm to a royalty trust named NCE Petrofund. The company continues to hold stakes in two major offshore projects in eastern Canada named Hibernia and Terra Nova, as well as an oil sands project named Syncrude.
"This was not any departure from our strategy, which is to periodically market some of our higher cost and more mature assets," said Harvey Doerr, president of Murphy Oil's Canadian subsidiary. "Properties in western Canada are becoming more mature, and as production rates fall, your costs per unit go up. There is not much you can do about it."

The increasing cost of operating in the area is certainly a motivating factor for many sellers. The cost of electricity is one of the highest elements of operating costs.
A recent study by Ziff Energy Group of 195 oil and gas fields in western Canada showed that operating costs in the area continue to rise. Average oil operating costs increased 9 % to $ 6.50 per boe produced from $ 6.10 per boe in the prior year. For gas, the average cost increased by 18 %. Energy costs for electricity and natural gas increased by 38 % for gas and 32 % for oil.
The cost of services also increased, the study found, raising the total cost of repairs and maintenance by 33 % for gas and 11 % for oil. Marathon has announced it wants to sell all of its western Canadian operations and focus its efforts in the country on its exploration activities offshore near Nova Scotia. The sale is part of an ongoing program the company has to sell off non-core assets.

Marathon's western Canada producing operations account for about 21,000 bpd of oil equivalent. Lehman Brothers concluded in a recent report that poor returns on the western Canadian properties led Marathon to put them on the block. The report estimated that the Marathon properties could fetch as much as $ 735 mm.
"They are still up for sale," said Paul Weeditz, Marathon spokesman. "We are looking at our portfolio on a continuous basis for assets that may not have a strategic fit."

Many of the properties on the market are spread out and not concentrated in core areas of the basin. Burlington Resources, which has made western Canada one of its primary production areas, has been picking up properties in small deals to add to its core areas in the region, said Tommy Nusz, vice president of acquisitions for the Houston oil company.
"The western basin is a huge basin and it is not that much different from other areas of North America where you have established positions of concentrations and competencies that allow you to differentiate yourself," Nusz said. "We try to be proactive rather than just responding to what's on the market."

Tulsa-based Vintage Petroleum recently announced plans to sell some western Canadian properties. Vintage paid $ 593 mm for Genesis Exploration in May 2001 and also bought Cometra Energy of Canada in late 2000.
The company's Canadian production is falling rapidly. Its Canadian oil and gas production were both down during the first quarter compared to the year-ago period. Vintage said earlier this month that it had received bids on its Canadian properties for sale.

ConocoPhillips is selling off western Canadian properties but it remains a huge presence in the region. Its property sales are mostly stray wells it picked up in its deal to buy Gulf Canada.
"For most of the properties we had on the market we have concluded sales, and we are in negotiations on the others," said Peter Hunt with ConocoPhillips in Calgary. The company was able to readily find buyers for the properties, he said.
ConocoPhillips has plenty of other Canadian projects. Most recently it announced it had received approval from the Alberta Energy and Utilities board to proceed with an oil sands project named Surmont in far northeast Alberta. The project is believed to have reserves of 5 bn barrels of heavy oil. The Gulf Canada acquisition also gave ConocoPhillips huge untapped reserves in the far northern MacKenzie Delta region. "They were assets that are worth more in other hands than ours," Hunt said.