North America: Canada

NORTH AMERICA

Canada

Robert Curran, Calgary, Alberta

Early in 2000, oil and gas producers were a wary bunch. Strengthening commodity prices and increasing demand were not enough to shake the pessimism they had accumulated through the previous year-and-a-half. All indications were that the year ahead would be a good one, but very few could have predicted the incredible turnaround the industry staged in the first half of this year.

Overview. What started out cautiously, as a rebuilding phase, has quickly turned into a blizzard of activity this year, with soaring oil and gas prices boosting results, drilling levels and spending plans. The wait-and-see attitude of the first quarter has quickly transformed into a high-activity mentality, with companies desperately trying to book rigs and equipment to develop their land holdings. Numerous companies have announced capital spending increases, and some are considering dispensing a portion of their high cash flow back to shareholders.

The rapid upswing has also produced a great deal of discrepancy between the companies that were already well positioned coming out of 1999, and the ones that had been hit hard by low crude prices and market doldrums. This gap has led to a flurry of activity in the Canadian sector, with a number of prominent firms falling to rivals with deeper pockets or better balance sheets.

The most prominent is former market darling Renaissance Energy Ltd., which had been battling low share prices since missing its production targets in mid-1998. Renaissance was taken over in June by private Husky Oil Ltd., the Canadian oil concern of Hong Kong’s Hutchison Whampoa Ltd. The deal calls for Husky to purchase up to 27.8 million shares of Renaissance for C$18 per share, up to a maximum of C$500 million. All Renaissance shareholders that do not choose the cash option will receive one Husky share for each Renaissance share.

Meanwhile, Canadian Natural Resources Ltd. has taken over Ranger Oil Ltd. for C$1.6 billion in a cash-and-stock deal, greatly expanding its heavy oil and international presence. Ranger had been actively seeking a buyer after it failed to recover from devastating heavy oil prices in 1998 and could not afford to develop its capital-intensive international offshore projects in Africa and the North Sea.

Despite high oil and gas prices and bullish demand forecasts, the oil and gas sector has not seen a similar recovery in share prices. The number of undervalued oil and gas stocks has led to a wide variety of other corporate deals, providing good value for companies suddenly awash in cash flow, but with fewer prospects on which to spend their money.

Public companies are hoping their continued strong financial performances will lure investors back to the sector, but energy stocks have still not regained a sustained level of interest since the black days of October 1997. Nevertheless, a tabulation of first-quarter results by the Daily Oil Bulletin indicates the net income of 43 producers was more than half the net income of a group of 123 companies for all of 1999.

Provincial governments are also cashing in on the torrid prices and strong activity levels, with Alberta and Newfoundland expected to lead the country in economic growth this year.

The industry has also enjoyed a continued increase in oil and natural gas sales to the United States, and the associated benefits of the favorable exchange rate between the Canadian and American dollars. The relatively low value of the Canadian dollar provides a buffer for Canadian producers when commodity prices are low and bonus revenue when prices increase.

Development plans are proceeding in some of Canada’s higher-cost areas (such as Alberta’s massive oilsands deposits), offshore projects on the East Coast and the far north, which is once again drawing interest for its large, but extremely remote, natural gas potential.

Land Sales. Revenues collected by provincial authorities often are cited as a key indicator of industry activity. So it is not surprising that first-half revenue almost tripled the amount spent at the halfway point last year, rising to C$649.6 million across Western Canada, up 188% over the C$225.2 million collected in 1999. Depending on the pace of the second half, 2000 land sales revenues could approach the all-time high of $1.51 billion set in 1997.

Alberta led the way through six months, collecting C$546.3 million, followed by British Columbia at C$87.4 million, Saskatchewan at C$15.6 million and Manitoba at C$290,132. The average price per hectare in Alberta was $301, the highest level since 1984. In British Columbia, the average was $339 per hectare, compared to $239 through June of 1999.

High natural gas prices also have rekindled interest in other areas, such as the Yukon. Last year, the Canadian territory initiated its first ever call for bids, and plans to issue a second call for nominations this summer. The territory is almost completely unexplored, with only 71 wells drilled in total.

The Yukon also is lobbying industry and other governments to support the proposed Alaska Natural Gas Transportation System, which would carry gas from Prudhoe Bay, through the Yukon, and south to U.S. markets.

Drilling. Frantic may be the best word to describe current activity levels in the drilling and service sectors. With drilling on a record pace, demand for rigs is once again driving day rates up, and companies often are scrambling to get a rig under contract for their drilling programs.

Canadian drilling is proceeding at near-record levels, with more than 16,500 wells expected this year. (Photo courtesy of Tesco Corp.)

Through June, there were 7,238 wells completed in Western Canada, according to the Daily Oil Bulletin, of which 2,469 (34%) were oil wells, 3,670 (51%) were gas wells, and 1,099 were abandoned. The first-half 2000 total is 68% higher than the 4,313 wells drilled during the same period in 1999, and about 250 ahead of 1997’s total, when a new record high for completions was established. At the current pace, drilling will surpass the former record of 16,484 wells, and at worst, will end up at or near the 16,000-well mark, a close second.

The summer months have proved to be more productive in 2000, compared to last year, with considerably less rainfall allowing drillers to access areas that were too muddy or unstable in 1999. Gas drilling has normally been the focus in the summer, and this year is no different. What is different are the unprecedented gas prices, coupled with bullish demand and insufficient supply.

As optimism for the remainder of this year has increased, so has the Canadian Association of Oilwell Drilling Contractors’ projection of wells to be drilled in 2000. The latest forecast from the CAODC is for 16,566 wells to be drilled, which would set a new record. In September, the association predicted a total of 14,331 wells would be drilled this year.

Rig utilization is expected to average 67% for the year, with an average of 405 rigs working out of the total fleet of 601. The higher activity is also expected to drive prices up by as much as 20–30% in the second half, even though prices are already well above last year’s. The nominal break-even point for average activity cited by the drillers is 55% utilization.

Meanwhile, the Petroleum Services Association of Canada revised its forecast in May to 15,529 wells for the year, after originally projecting a total of 14,500 in January. Of that total, 9,250, or 60.3%, will be gas wells, says PSAC. The service association has traditionally been somewhat more bearish in its forecasts than the CAODC.

World Oil’s six-month survey of Canadian drillers confirms that industry’s focus has shifted away from oil, since 62% of all wells drilled will target natural gas (see accompanying table). Last year, producers said they would target gas 59% of the time. But unlike last year, activity will taper off among survey participants, running counter to current projections.

Total second-half drilling is expected to drop by almost 28%, with the largest decline in British Columbia (83%). Activity in Alberta will fall by 37%. Saskatchewan and Manitoba run counter, showing increases of 108% and 150%, respectively.

Production. As conventional oil reserves continue to dwindle in Western Canada, larger producers are increasingly turning their efforts toward large natural gas finds and heavy oil / oilsands development. Crude oil production declined for the second straight year to 1.34 million bpd, down 6% from 1.43 million bpd in 1998.

Total production of crude oil and equivalent, including bitumen, synthetic and natural gas liquids, was 2.59 million bpd, down nearly 3% from 2.66 million bpd in 1998. The overall decline – the first since 1989 – was partially due to the 13% decrease in bitumen production, a carryover from the spending cutbacks and shift away from bitumen and heavier blends in 1998 and most of 1999.

Synthetic production continued to chug along, however, posting yet another record. Output from the Syncrude and Suncor mines near Fort McMurray, Alberta, rose to 323,397 bpd in 1999, up 5% from 307,962 bpd the year previous.

Expansions to the Suncor and Syncrude operations, other large-scale projects, proposed by Koch, Shell Canada, Canadian Natural Resources Ltd., and a slew of smaller, steam assisted gravity drainage schemes, will increase oilsands production to about 1.3 million bpd by 2010, if all projects go ahead as planned.

Offshore production also continues to post substantial gains, increasing to a record 105,826 bpd, up 30% from 81,661 bpd in 1998. With production increases at Hibernia and a slate of new projects in the works, the more bullish in the industry say East Coast output should represent about 40% of Canada’s light and medium oil production by 2005, and may surpass Western Canadian light and medium production by 2010.

Natural gas production continues to surge, reaching another all-time high of 16.43 Bcfd in 1999, up 3% from 15.93 Bcfd the year before. Over the past ten years, Canada’s natural gas industry has grown 67%, from 9.85 Bcfd in 1990. Export volumes were once again the primary reason for these gains, increasing 6% to 9.13 Bcfd last year, compared to 8.62 Bcfd in 1998.

Offshore. Offshore activity is expected to gain momentum on the East Coast as a growing infrastructure and better understanding of the area promote further development. The Hibernia project has boosted production up to 180,000 bpd from 150,000 bpd, and earlier this year, PanCanadian Petroleum Ltd. announced what it called a "significant natural gas find" off the coast of Nova Scotia.

The next two developments are expected to be of the White Rose and Hebron fields. White Rose is just over 200 miles east of St. John’s, Newfoundland, with the main oil pool thought to contain proven plus probable oil reserves of 250 million bbl. Production is tentatively slated to begin in 2003.

Hebron, about 20 miles southeast of Hibernia, consists of three fields, is highly fractured and predominantly contains heavy oil, with reserves estimated to be anywhere from 250 million to 600 million bbl. Current plans could see first oil in late 2005 or early 2006.

Meanwhile, more and more producers are looking into the East Coast’s deepwater potential. Petro-Canada is talking about drilling a well in 3,000 ft of water offshore Newfoundland as early as next year. Kerr-McGee Corporation and Shell Canada Ltd. have also tentatively targeted 2002 to drill deepwater wells offshore Nova Scotia.

What 25 Canadian drillers plan for 2000