Warmer-than-expected weather in the first-quarter drilling season will put a bit of a chill on final 2005 drilling results, although more wells should be spudded this year than last, the Petroleum Services Association of Canada (PSAC) predicts.
Temperature spikes, particularly in southern Alberta and in southeastern Saskatchewan, in addition to a premature spring breakup - which generally begins in early April - led to road closures early in the season. In turn, that hampered drilling efforts in the first three months of the year, prompting PSAC to revise earlier forecasts.
"The warmer weather caused a decrease in rig activity (during the first quarter) - about 1,000 fewer than we had called for - and we just don't see that we'll completely make up those wells for the balance of the year," PSAC president Roger Soucy said following a presentation at an association luncheon in Calgary last week.
"We'll make up most of it, but the reality is that it's a function of the availability of people to get at the work," he added, referring to the current shortage of skilled rig hands.
Back in January, PSAC had forecast that 24,075 wells would be drilled across Canada. Last year saw the total number of wells drilled reach 22,683.
PSAC now forecasts a total count of 23,825 Canadian wells in 2005, including 18,455 in Alberta, 3,940 in Saskatchewan and 1,220 in British Columbia. This revised number represents drilling increases of approximately five per cent in Alberta and eight per cent in Saskatchewan while B.C. remains flat, compared to well counts in those provinces last year.
Canada's largest drilling and oilfield service company, Precision Drilling Corp., felt the effect of decreased drilling, but said it managed to boost its first-quarter profits in any case, "demonstrating the success of Precision's efforts to expand internationally, as well as its pricing strength in the Canadian market."
The Calgary firm reported last week that it earned $138.5 million in the first quarter of 2005, up from $106.1 million for the same period a year ago.
The shortfall of wells drilled in the first quarter - historically the busiest three-month period of the year - shone the spotlight on the cyclical nature of the industry. Soucy has long pushed explorers and producers (E&Ps) to examine ways to spread out drilling programs over the course of the year, instead of the mad dash during the first 90 days.
While he said there are cases when industry obviously must drill during the winter season - such as in northern areas where mushy muskeg precludes operations during warmer months - in other instances, such as on the dry prairies, more drilling could take place year-round.
However, changing this mindset isn't easy because the industry is accustomed to carrying out activities between January and March.
Soucy hopes a PSAC study now looking at the issue will show industry the advantage of drilling outside the regular drilling season, including cost advantages to the E&Ps who, if they adopted a year-round approach, wouldn't have to compete so fiercely for rigs.
PSAC based its revised 2005 forecast on an average oil price of $48 US per barrel and a natural gas price of $7 Cdn per thousand cu. ft. (mcf), which Soucy called conservative. But even if energy prices were to fall sharply, the effect on drilling programs would be negligible, he said.
"The reality is that current activity levels would probably still exist if oil prices were anywhere north of $35 US per barrel and gas prices were anywhere north of $4.50 Cdn per mcf," he told the audience during his presentation.
In addition, the higher prices are filling E&Ps' coffers faster than anyone anticipated six months ago, Soucy said, which also means capital spending will increase over 2004, by about half a billion dollars to around $10.5 billion.
Spil Kousinioris, vice-president of oilfield services with Ernst & Young Orenda Corporate Finance Inc., concurred with PSAC's robust evaluation of the current energy market - predicting sustained high commodity prices propped up by a tight supply-demand picture.
"The continued strength in commodity prices is really a demand-driven condition - notwithstanding, overall supply is expected to remain extremely tight," Kousinioris said in his address at the luncheon. "The Western Canadian Sedimentary Basin, as well as the basins in the United States, continue to mature and increased drilling on the part of producers ... is just to maintain production at a relatively flat rate."
This fact bodes well for Canada's oilfield service industry, especially for those companies geared toward heavy oil and oilsands operations, as well as coalbed methane (CBM) and other unconventional gas plays.
Unconventional resource gas plays, Kousinioris said, typically have lower geological and commercial-development risk, lower average decline rates and longer reserve lives. Lower interest rates have reduced the cost of capital and increased the value of long-lived assets.
All of that, combined with high natural gas prices, has strengthened the shift toward overall unconventional gas development.
"Some industry observers predict CBM output could reach two billion cu. ft. per day by 2015. So this market clearly represents a huge opportunity for those service companies leveraged towards CBM markets," Kousinioris said.
-with files from The Canadian Press
(John Ludwick can be reached at ludwick@businessedge.ca)
