The oilpatch – based on past experience – is always looking over its shoulder for the current good times to end.
So, are there any signs that the industry’s party is about to crash? Let’s crunch some numbers.
Husky Energy Inc. last week became the latest major player to report record earnings in 2003. Its net earnings jumped 64 per cent, to $1.32 billion or $3.22 per share last year, compared with $804 million or $1.88 per share in 2002.
The five largest integrated firms (both ‘upstream’ producers and ‘downstream’ refiners) – Husky, Imperial Oil Limited, Suncor Energy Inc, Shell Canada Limited and Petro-Canada – all recorded record profits in 2003.
True, Petrocan didn’t end the year with a stellar fourth quarter. Earnings fell to $200 million, down from $356 million in the same period in 2002.
Shell’s fourth-quarter profits also tumbled in 2003, to $190 million compared with $247 million in 2002. But Petrocan and Shell’s flat year-end finales had more to do with short-term pains than with long-term oil and gas prospects.
Petrocan’s quarterly profit drop reflected $82 million in after-tax charges after the company scrapped plans for an oilsands upgrader conversion at its Edmonton refinery, and $51 million in higher Ontario corporate taxes.
Shell’s fourth-quarter dip was due mainly to writing off its not commercially viable Glenelg exploration well at the Sable Island project offshore Nova Scotia.
Both companies also lowered their projected oil and gas production and reserves estimates for 2004. The short-term angst that caused investors is the main reason why Petrocan’s shares nosedived 12 per cent last week while Shell’s shares took a 2.5-per-cent hit.
But if oil and gas prices stay high, enabling companies to spend on exploration and perhaps acquire new production assets, Petrocan, Shell and other firms could well exceed their current expectations for this year.
Talisman Energy Inc., for example, plans to spend a record $2.35 billion on exploration and development in 2004. It intends to grow annual production by five to 10 per cent per share in each of the next three years.
Unless the bottom falls out of commodity prices, the industry’s good times will continue to roll in 2004.
ENERGY BULL PARTIES ON
How about the longer-term picture? No signs of a party-crasher there, either.
For one thing, commodity prices continue to hit historic highs.
The price of oil averaged $31.18 a barrel in the fourth quarter of 2003, and natural gas $5.43 per million British thermal units – up 11 per cent and 26 per cent, respectively, compared with the same period in 2002.
Some investment firms and analysts recently bumped up their 2004 oil price forecasts, to a range of $27 to $30 US a barrel.
Looking longer term, oil demand in the U.S. is predicted to increase from the current 20 million barrels per day (bpd) to 28.3 million bpd in 2025, according to the annual 25-year forecast by the U.S. Department of Energy’s Energy Information Administration (EIA).
The EIA says U.S. demand for natural gas also is projected to rise by an average 1.4 per cent per year, mainly because of more gas-fired power plants being built.
Gas exports from Canada are expected to remain at current levels of about 3.6 trillion cubic feet (tcf) per year through 2010, but then steadily decline to 2.6 tcf per year by 2025.
That means a supply crunch in the U.S. This is expected to drive up average gas prices to 50 per cent more by 2025 compared with the price in 2002, the EIA predicts.
Need more convincing? Natural Resources Canada, in a separate report, predicts that a sustained upward trend in prices and a ‘flat-line’ on production increases will more than double the current value of Canadian natural gas production, to $51 billion a year by 2015.
For four years now, the oil and gas industry and its investors have enjoyed a bull market. The harder the energy bull runs, the bigger the thud when it hits the wall of crashing commodity prices.
But there are no indications this will happen any time soon, and certainly not this year.
RESERVES REVISITED
So with all indicators pointing up, why are so many companies making investors jumpy by taking their reported oil and gas reserves in a downward direction?
Proved reserves (those that are well established and can be recovered under existing economic and operating conditions) are a key measure of a company’s value, including its potential to maintain and grow production.
The worries started last month, when the Royal Dutch/Shell Group chopped its proved reserves as of the end of 2002 by 3.9 billion barrels or 20 per cent – worth about $120 billion as crude oil at current prices.
Then last week, a string of companies further spooked investors.
Pengrowth Energy Trust lowered its proved reserves at its Sable Island gas project by about 28 per cent, following partner Shell Canada’s chopping its proved reserves in the Nova Scotia offshore project by more than 40 per cent.
Nexen Inc. trimmed its global oil and gas proved reserves by eight per cent and incurred an asset writedown of $175 million in the fourth quarter.
And Husky Energy says it is removing 13 per cent of its total natural gas reserves, including all of its proved reserves in Indonesia.
The juniors, with less diversity in their production areas than the majors, are likely to be hardest hit by reserves revisions. Redwood Energy Ltd. says it may slash its reserves estimate by 43 per cent, after receiving a preliminary report from its independent engineers.
But investors needn’t rush for the exit.
The flurry of revisions has to do mostly with Canadian and U.S. securities regulators tightening the rules on how companies define and count their reserves, including requiring third-party verification.
Disappointing news in Edmonton, where Grant Prideco – the world’s largest manufacturer and supplier of oilfield drill pipe – is laying off 113 of its 170 workers at its manufacturing plant in the city.
The job losses come at the height of one of the best drilling seasons in the history of the oilpatch.
Houston-based Prideco says the cost of making drill pipe in Edmonton, along with the expense of transporting it, played a role in the decision.
The soaring Canadian dollar probably also was a factor, especially since the company has drill pipe-making plants in Mexico and Texas that can supply pipe to western Canada.
Ironically, Prideco’s Edmonton plant was a highlight of a tour last fall during the city’s first Innovative Manufacturing Week.
The company says its Edmonton facility will continue making other types of specialized pipe and production tubing. And Prideco’s service facilities in Calgary, Leduc, Whitecourt and Fort St. John aren’t affected.
LE 'PETRO' PETIT GARS
Jean Chretien is a wanted man in the West, not the least by a Calgary court.
The 70-year-old former prime minister has joined Calgary-based PetroKazakhstan Inc. as a special advisor for international relations. Company CEO Bernard Isautier, who has known Chretien both in political and energy circles, contacted the former Kaptain Kyoto to help PetroKazakhstan open doors to new export markets for its oil.
Last month, Chretien became an international energy advisor at Bennett Jones LLP in Calgary – the same law firm at which his former nemesis on energy issues, then-Alberta premier Peter Lougheed, has been a partner for years.
But the one place where Montreal lawyer James O’Reilly really wants to see Chretien is inside a Calgary courtroom.
O’Reilly is representing the Samson Cree First Nation near Hobbema in a $1.4-billion lawsuit that claims the federal government mishandled the band’s oil and gas royalties over the past decades. And he has subpoenaed Chretien, who once also held the Indian Affairs and energy portfolios, as a witness.
When O’Reilly announced his intention last December, this column predicted that the odds of Chretien actually showing up in court were about the same as George Armstrong Custer had of surviving the battle of the Little Bighorn.
Now an associate of O’Reilly tells me that Chretien doesn’t intend to appeal his subpoena and is due in Federal Court on February 23.
It should make for some memorable slings and arrows.
