The Achilles heel of energy trusts is starting to show.

Oil and gas exploration companies, along with drilling and oilfield services firms, are generally outperforming the income trusts in the first quarter. High commodity prices are keeping these companies hopping in the hunt for new oil and gas.

The non-exploration trusts, on the other hand, depend on buying other companies’ production and reserves to grow. But the trusts are finding it increasingly expensive to expand through the chequebook rather than the drilling bit.

Precision Drilling Corp., which last week bought U.K.-based Reeves Oilfield Services Ltd. for $218 million, and Akita Drilling Ltd. reported their best-ever first-quarter earnings, this column noted a couple of weeks ago.

Now the services firms are turning in stellar earnings.

Ensign Resource Service Group Inc., Canada’s second-largest oilfield services company, reported its highest-ever first-quarter profit. The Calgary firm says its profit rose 37 per cent to $53.3 million, or 71 cents per share, from $38.9 million, or 52 cents, in the same period of 2003.

Calgary-based Savanna Energy Service Corp. more than doubled its quarterly profit to $6.2 million, or 23 cents per share, compared with $2.9 million, or 14 cents, in the year-earlier period.

How are the income trusts faring in comparison? Not so hot.

Paramount Energy Trust reported a 93-per-cent plunge in first-quarter profits, to $1.9 million, or four cents per unit, compared with $25.9 million, or 64 cents, a year earlier.

Paramount managed to increase production by buying properties earlier this year. But it’s also the energy producer most affected by an Alberta Energy and Utilities Board (EUB) decision to shut in natural gas production in the Athabasca oilsands to protect future bitumen extraction.

Pengrowth Energy Trust reported a big drop in first-quarter profits, to $38.7 million, or 31 cents per unit, compared with $62.9 million, or 57 cents, for the same period last year.

It’s no coincidence that the company’s daily barrels of oil equivalent (boe) production also fell by 10 per cent.

Even trusts with drilling programs are struggling due to the strength of the Canadian loonie against the U.S. greenback, in which oil and gas prices are paid.

APF Energy Trust’s first-quarter profit fell 41 per cent to $8.1 million, even though the trust drilled a record 27 wells during the period – up from 16 wells a year earlier.

ARC Energy Trust’s first-quarter earnings dropped to $40.1 million, or 22 cents per unit, compared with $66 million, or 50 cents, last year.

Peyto Energy Trust is an exception among the trusts’ less-than-robust results. Peyto reported a 31-per-cent rise in first-quarter profit, to $24.3 million, or 53 cents per unit, compared with $18.5 million, or 40 cents, in the same 2003 quarter.

Peyto’s secret? The trust increased its production by 34 per cent from a year earlier, to 16,414 boe per day. Peyto also had a 20-per-cent increase in oil and gas sales.

Now those are the kinds of sales that can launch a thousand ships.

Mutual Benefits

The energy industries in Canada and the U.S. continue marching toward the same drummer. The Calgary-based National Energy Board (NEB) and the U.S. Federal Energy Regulatory Commission (FERC) have signed an agreement to enhance interagency co-operation.

NEB chairman Ken Vollman and his American counterpart, FERC chairman Pat Wood III, signed the memorandum of understanding in Halifax last week It makes sense, in terms of harmonizing regulations, to have the two national energy regulators working together more closely, given the increasing number of cross-border facilities and activities – from natural gas pipelines to interconnected electricity grids to coal mines.

But the NEB also needs to be cautious that its closer relationship with the FERC doesn’t compromise Canadians’ interests in having a vibrant, homegrown energy industry that also protects our environment.

It would be penny-wise and pound-foolish, for example, to greatly increase air pollution and greenhouse gas emissions in the Fort McMurray area simply to export more oilsands-generated electricity south of the border.

Co-operation also means achieving a balance.

Looking To Repeat

Synodon Inc. would like nothing better than to become the Edmonton version of industrial gas-detection maker BW Technologies Ltd.’s Calgary success story.

BW Technologies, founded in 1986, is being acquired for a cool $260 million by Britain’s First Technology PLC.

Synodon is developing realSens, its patented advanced natural gas leak-detection system based on satellite technology produced in an earlier form for the Canadian space program.

The company plans to market its airborne system initially to detect leaks in natural gas pipelines, of which there are 4.8 million kilometres stretching the equivalent of 120 times around the globe. Synodon says it has just secured about $600,000 in equity financing to be used for the final design and manufacturing of the first commercial realSens system.

CEO Adrian Banica says the financing includes a $420,000 investment from a Middle Eastern corporation and a distribution option for the system in a number of countries in the region.

‘A’ For Effort

The oilpatch’s compliance with EUB rules is getting better, despite record levels of activity.

The industry achieved improved performance overall in 2003, with significantly better results in oilfield facility inspections and pipeline failures, the provincial energy regulator says.

Major unsatisfactory inspections (a potential risk to the public or the environment) of rigs, pipelines, and oil and gas production facilities declined by 23 per cent compared with the previous year, the EUB says in its annual report on field surveillance work. The number of corrosion-related pipeline failures fell by 22 per cent.

At the same time, the EUB reports record levels of activity in 2003, including 17,108 drilling licences issued, a 29-per-cent jump compared with 13,193 in 2002.

Yet there was only one well blowout in 2003, compared with six the previous year.

The EUB also responded to 817 complaints from the public about industry operations and activities in 2003, a drop of six per cent compared with 869 in 2002.

Take a bow, oilpatch. But no resting on your laurels.

EnCana Facing Fines

EnCana Corp., whose first-quarter profits fell by 65 per cent to $290 million US, got some more bad news last week.

The company is facing possible fines after one of its natural gas wells leaked benzene into a creek near Silt in northwestern Colorado (see April 7’s column). Benzene can cause cancer, but the chemical – which is also in the gasoline you buy at the pump – tends to dissipate rapidly in the environment.

The Colorado Oil and Gas Conservation Commission says one of EnCana’s gas wells drilled near the creek had significant problems with its cement casing, allowing gas to seep into the creek bed.

The commission could fine EnCana up to $10,000 US per violation or higher if there’s a significant environmental impact, according to a report.

Whatever the fine, it won’t come anywhere near the $45 million EnCana sunk into the Weymouth A-45 offshore gas well, about 250 kilometres southeast of Halifax.

The company, which had a 55-per-cent interest in drilling the deepest well in the Atlantic, abandoned the $100-million deep-well duster after the 6,250-metre hole came up dry.