If you are looking for light oil in Western Canada, you are already pining for a return to slower days.
With explorers big and small beating a hasty retreat from natural gas and stampeding into oil, oil-field inflation and labour shortages are back, lending credence to warnings about another bubble in the oil patch even as the natural gas side of the business continues to falter and the broader economy limps along.
“It’s very competitive,” said Mark Dolar, president and CEO of
Nextraction Energy Corp., a Vancouver-based junior looking for oil in
Western Canada. “The worst time to try to find and buy oil plays is when
oil prices are US$100 a barrel. Rig crews are very hard to come by.
Fracking crews are very hard to come by. And you make the best contracts
that you can.”
The charge into conventional oil in Western Canada was started by junior companies applying new horizontal drilling/hydraulic fracturing technologies to mature oil fields such as the Bakken in Saskatchewan.
It swelled as other juniors switched their focus to oil and larger companies joined the party while waiting for natural gas prices to recover.
“When most gas is uneconomic, it only leaves oil to chase,” said Kim Davies, president and CEO of Calgarybased Terrex Energy Inc.
Only a few months ago, the junior company was a trailblazer in specializing in enhanced oil recovery techniques in Western Canada. Now it’s competing with larger companies adopting similar plans, pushing up asset prices and making it harder to acquire mature oil fields.
With the search for light oil so intense, companies look for competitive advantages: knowledge of a certain play, an understanding of how to complete certain wells. Smaller companies with specialized knowledge can be nimbler than big competitors, Ms. Davies said on the sidelines of an investment conference organized this week by the Small Explorers and Producers Association of Canada.
But those new technologies also come with challenges. There are few people with the knowledge and experience to apply them and competition for their skills is intense, in Canada and abroad.
“It used to be that you drilled a hole and you put a pump jack on,” Ms. Davies said. “Horizontal drilling and completions are so much more complicated. These are specialized processes that require a lot of engineering.”
In a new drilling forecast released Wednesday, the Canadian Association of Oilwell Drilling Contractors (CAODC) said it now expects drilling activity in Western Canada during the last three quarters of 2011 to be 24% higher than anticipated last fall, resulting in 1,300 more wells. The group now expects 13,128 wells to be completed in 2011, up from 11,587 in 2010 and 8,278 wells in 2009.
Almost 60% of wells are directed at oil targets, and those wells increasingly use horizontal drilling. The rest focus on gas that is rich in liquids, which get oil-level prices.
CAODC president Don Herring said the activity rebound would be higher if not for a shortage of rig hands. Many workers downsized during the financial downturn left the business altogether for more secure jobs, he said. “If gas prices were sufficient to lead to much greater investment, we would have a real difficulty satisfying expectations.”
Chris Seasons, president of the Canadian subsidiary of Devon Energy Corp., a large U.S.-based independent that has moved a lot of its Canadian spending to oil, said inflationary conditions are returning in both the “light and tight” or conventional oil part of the business, and in the oil sands.
In conventional oil, costs for pumping services are up and there is a shortage of equipment and trained manpower, which can move to the United States for bigger rewards without too many barriers, he said. In the oil sands, “it’s beginning to look a lot like 2007,” Mr. Seasons said, due to escalating costs and a shortage of qualified staff. “We are not there yet, but we can see it on the horizon.
Gord Currie, senior oil and gas analyst at Salman Partners Inc. in Calgary, said the oil patch is returning to pre-financial downturn conditions, but not everyone is benefiting.
“You have haves and havenots,” Mr. Currie said. “If you happen to have acreage that is oil prone, you are probably in pretty good conditions. You are struggling with the issues of the access to services and cost pressures, but at least you got oil.
“But if you don’t have oil, you are in a holding pattern, trying to crank down your costs, drilling anything that is a bit economic [such as liquids rich natural gas], and you wait and hope for something to change.”
Source: Financial Post