Canadian producers put dismal 2009 behind them

On the heels of the toughest year for the Canadian oilpatch this decade, producers are hoping for better times ahead.

Robert Curran, Contributing Editor, Canada

One year ago, the Canadian industry was faced with an unusual circumstance as oil and gas prognosticators displayed uncustomary solidarity in their views of the world to come in 2009. Their assessment? It was going to be a difficult year. The only area in which they differed was how bad it was going to be.

As the decade closed, the soothsayers were proven correct. Drilling totals fell by half as natural gas prices sagged, with the unexpected strength of oil prices standing out as the lone exception to their dismal forecasts. Ironically, that proved to be problematic for the Canadian industry as well, as the Canadian dollar gained significant value against its American counterpart, cutting into export revenues. In early January, the Canadian dollar was trading at approximately the 95-cent mark compared to the greenback. One year ago, it was trading below 80 cents US.

Even so, there is actually some cause for optimism in the early stages of 2010, muted though it may be. Oil prices have remained relatively stable and natural gas prices have rebounded as operators have shut in marginal production, causing storage volumes across North America to fall from mid-2009 levels.

POLITICS AND TAXES

As the recession worsened in 2009, the anti-oil lobby appeared to lose ground, culminating in the meeting of world leaders in Copenhagen, where they fell well short of the expectations expressed by environmental lobbyists around the globe. In  Canada, concern that inordinately punitive measures might be ensconced in the agreement proved baseless, as Prime Minister Stephen Harper pledged instead to keep Canada’s efforts in line with those established in the US.

Amid debate fueled by the untapped potential of Alberta’s massive oil sands reserves, Alberta’s Premier Ed Stelmach unveiled a 20-year development plan for the oil sands, designed to reduce environmental impacts without adversely affecting economic growth opportunities.

On the natural gas front, Alberta is once again facing criticism for its royalties on shale gas projects. Compared with other North American jurisdictions where shale gas deposits have been developed, including the province’s neighbor British Columbia, Alberta ranks last.

British Columbia’s government has been actively encouraging development in the province, offering producers incentives to develop its resources. So far, the strategy has worked, as British Columbia took in higher land sale revenues in 2009 than Alberta for the second year in a row, answering commentators who had called the province’s 2008 surge in sales a one-year phenomenon.

SPENDING

Compared to the numbers posted in 2008, profit, revenues and cash flow in 2009 were down substantially. The recent uptick in commodity prices has also been reflected on the stock markets. According to Calgary’s Peters & Co., its bellwether PE 100 index rose 41% last year, after declining 38% in 2008.

With the improved outlook and better results comes a definitive upswing in spending plans for the year ahead compared with 2009 levels. The total, however, will likely fall well short of the C$51.9 billion producers shelled out in 2008, according to statistics from the  Canadian Association of Petroleum Producers (CAPP).

Among the top spenders this year will be the two entities EnCana and Cenovus, which were both formerly known as EnCana Corp. EnCana’s bigger projects include shale gas developments in the Haynesville play (Louisiana and Texas) and the Horn River area of northeastern British Columbia. Combined preliminary spending figures are C$3.6–$3.9 billion for EnCana and $2.0–$2.3 billion for Cenovus, or $5.6–$6.2 billion combined.

Suncor Energy has unveiled a C$5.5 billion capital spending program in 2010, with $1.5 billion allocated to growth and $4 billion to sustaining capital. The company’s oil sands operations will take a big chunk of both categories, representing about $3.2 billion. Included in that is the expansion of its Firebag project and completion of the Millenium naphtha unit.

Other top spenders include Talisman Energy, with an almost 10% increase to C$5.2 billion, and Canadian Natural Resources, with plans to invest C$3.9 billion this year. Husky Energy has proposed a C$3.1 billion spending plan, while Nexen plans to keep spending flat at C$2.5 billion.

MERGERS AND ACQUISITIONS

One of the few measures that went up in 2009 was the level of mergers and acquisitions.

Whereas the M&A value in 2008 equaled C$20 billion, the total value of M&A activity in 2009 was C$47 billion, according to Calgary-based Sayer Securities. $27 billion of this total was represented by Suncor’s takeover of former Crown corporation Petro-Canada.

This year, Sayer is predicting an upswing in M&A action, given the number of large properties already on the market and the fact that less leeway will be given by the banks to companies that find themselves in a weakened financial state.

Suncor has already announced plans to sell anywhere from C$2 billion to $4 billion worth of assets this year, and Cenovus announced plans to divest about $1 billion worth of assets through 2011, including some $500 million worth of non-core natural gas assets in Western Canada this year.

In August, PetroChina, a subsidiary of China National Petroleum Corp., offered C$1.9 billion for 60% control of Athabasca Oil Sands Corp. That deal was approved by the Canadian government in early January 2010. In October, Korea National Oil Corp. acquired troubled Harvest Energy Trust in a paper and assumed-debt deal worth just under C$4 billion. The deal represented a 47% premium on Harvest shares.

DRILLING

It seems that when the low portions of the cycle arrive, drilling always takes the immediate hit, and last year was no exception. Daily Oil Bulletin records indicate that drilling fell to 8,377 oil and gas wells, down more than 50% from last year’s total of 16,834. The 2009 levels were also the lowest total since 1992, when just under 4,800 wells were drilled, according to CAPP statistics. In Alberta, the well count fell 50% to 5,802, compared with 11,687 in 2008. Drilling activity in Saskatchewan plummeted 56% to 1,761 versus 4,013 a year earlier. And in British Columbia, the number of wells drilled dropped 34%, from 847 to 563.

For 2010, the Canadian Association of Oilwell Drilling Contractors is predicting a slight increase in oil and gas wells drilled, to 8,523. However the Petroleum Services Association of Canada has revised its forecast and is now calling for 9,000 wells drilled in 2010, an increase of just over 7%. And Calgary-based Peters & Co. is even more bullish, predicting that Canada’s well count will reach 11,000 this year.

Meanwhile, World Oil’s survey of Canadian drillers indicates that there may indeed be an increase, but it will be more in line with PSAC’s prediction of 9,000 wells. The survey also shows that the trend toward more horizontal drilling may be accelerating. Many Canadian producers are now kicking multiple horizontal legs off vertical wellbores, saving time and cost, as well as reducing risk.

LAND SALES

The total amount of land sales revenues collected by Western Canadian governments was just under C$1.76 billion in 2009, almost 65% lower than the record $5.01 billion collected in 2008. It was also the lowest amount collected since 2003. Of more concern, however, is the amount of land purchased—2.56 million hectares, the lowest total since 1992, when 2.19 million hectares were sold. Land inventories are one of the most consistent indicators of future drilling activity, and low land sale volumes do not augur well for any sort of dramatic recovery in Canada. 

An extended version of this article including more-in-depth analysis can be found in the 2010 World Oil Forecast and Data Book. To purchase, click here or call +1 (713)520-4426.