Bean counters and number crunchers are in full swing in Canada assembling 2013 capital budgets against a worrying backdrop of shaky industry forecasts, sharp declines in government land auctions and plunging new well permits issued by regulators.
The current betting points to troubles for the upstream, reflected in gyrating oil and natural gas prices, and a continuation of the lackluster showing in the drilling sector that has extended over recent years.
One of the early messages came from Schlumberger Chief Executive Officer Paal Kibsgaard, who told analysts that liquids activity in North America will “no longer be able to offset the drop in dry gas drilling. This indicates no immediate change in the headwinds.”
Baker Hughes echoed some of those sentiments, anticipating its own capital spending will drop 25 percent, while the North American rig count will be down 1 percent while Halliburton reported that contracts are being renewed at lower prices.
Kibsgaard said his firm let crews go in the second and third quarters to protect its margins and is ready to lay off more if margins fall below an unspecified level.
He said Schlumberger expects hydraulic fracturing margins in Canada will continue to fall this quarter and into early 2013 at least as new pricing levels are worked into the system.
Kibsgaard said fracturing margins have already dropped from about 30 percent to single digits, partly because of surplus pressure pumping capacity and cost inflation for raw materials, predicting that by the end of 2012 the sector will be at levels reached after the 2010 BP Macondo well blowout when rigs were idled.
Drop in capital spending
In Canada, capital spending is expected to total C$55 billion this year, down from C$63 billion in 2011, but no overall targets have been issued yet for 2013. Despite the demand around C$15 billion-C$20 billion in annual oil sands outlays in Alberta, where Suncor Energy and its partner Total are rethinking billions of dollars in planned spending, conventional and resource plays still claim around two-thirds of Canada’s oil and gas spending .
When companies start releasing their 2013 capital budgets in November, analysts doubt many will be swayed by the latest revival in gas prices and most will reflect their uneasiness about oil price trends.
Stephen Calderwood, vice president of investment banking at Salman Partners, said most producers in Western Canada are developing “tightly controlled budgets around an oil strategy” and are unlikely to change their plans even if gas tops C$6 per thousand cubic feet this winter.
He said there is little confidence that “any kind of rally” over C$4 will survive for more than a short period.
Martin King, vice president of institutional research at FirstEnergy Capital, was a shade more optimistic, suggesting the mood among gas producers is “receptive but cautious.”
Price forecasts 2013 story
But price forecasts are “more of a developing 2013 story. We’re going to have some improvement, but it’s not stellar.” King said 2012 will be the low point for gas prices, although any improvement next year “on an absolute dollar basis will not necessarily tickle anybody pink.”
He doubts that gas-weighted companies “are ready to jump on the spending bandwagon just yet after the blood that was spilled in the first half of this year” when prices at the AECO hub in Alberta slumped to C$1.50 per thousand cubic feet in the spring before recovering to an expected 2012 average of C$2.14 compared with C$3.63 in 2011 and C$3.99 in 2010.
King said that if U.S. gas prices remain close to US$4 per million British thermal units, the significant fuel switching from coal to gas at U.S. power plants could go into reverse, with consequences for Canadian producers who rely heavily on U.S. exports to consume two-thirds of their production.
FirstEnergy is predicting AECO gas will average C$3.51 per thousand cubic feet in 2013 and C$4 in 2014 and 2015.
Matt Donohue, an analyst at UBS Securities, told an industry outlook conference that gas producers such as ARC Resources, Tourmaline Oil and Peyto Exploration & Development, supported by experienced management teams and growth potential, are among those best positioned to benefit from strengthening gas prices, but he emphasized that patience will be needed.
The benchmark statistics that underpin much of the budget planning reinforce the watch-and-wait sentiment.
Land sales slump
Government land sales, after a decade of setting new records in the Alberta oil sands and the shale plays of British Columbia and Alberta, have slumped in all regions this year. For the first nine months, successful bids raised C$1.07 billion across Canada, compared with the highs of C$4.12 billion in 2008, C$3.71 billion in 2006 and C$3.41 billion in 2011.
Average land prices plunged to C$295.78 per hectare (2.471 acres) from C$846.79 over the same period of 2011, while the amount of land acquired by operators declined to 3.61 million hectares from 4.02 million hectares to the end of September 2011.
Analysts say that despite the drop in land spending, the Western Canada Sedimentary basin — which drives upstream activity in the provinces of Alberta, Saskatchewan, British Columbia and Manitoba — the region will have considerable unconventional prospectivity for companies able to use modern drilling and completion technology.
Alberta recorded C$873 million in land sales for the January-September period, well behind the torrid pace over the same period last year which generated C$3.06 billion, with per hectare averages dropping to C$356 from C$884.
Saskatchewan, with its mix of natural gas and oil prospects, notably the Bakken formation, slipped to C$94 million on 36,454 hectares from C$228 million from 462,741 hectares, to the end of September 2011, while gas-weighted British Columbia, after many years of topping C$1 billion, has fetched only C$101.5 million from bids on 97,376 hectares compared with last year’s C$147.5 million from 139,962 hectares.
New well permits lethargic
Compounding the decline in land auctions, new well permits carrying a 12-month expiry date indicate a lethargic year ahead. For the nine-month period, 13,440 well authorizations were granted across Canada, down 19 percent from the same stretch of 2011, with horizontal wells accounting for 6,037 licenses against 6,980 to the end of September last year.
Of the leading provinces, Alberta’s tally dropped 18 percent to 8,093, Saskatchewan was down 17 percent to 3,249 wells and British Columbia plunged 48 percent to 483. Only Manitoba, which includes part of the Bakken play, posted an increase, up 14 percent to 528.
Government records show 7,776 permits were issued in Western Canada to drill for oil or bitumen, off 12 percent from last year, while gas permits for 1,291 wells compared with 2,531 wells in 2011 and the record 14,837 wells in 2005.
Excluding experimental wells, Canadian Natural Resources was the only producer to top the 1,000 mark, licensing 1,087 wells, followed by Husky Energy at 690, Cenovus Energy at 521, Encana, once the undisputed leader, at 317 and Crescent Point Energy, one of the most active Bakken operators, at 300.
On the bitumen front, Canadian Natural obtained 764 well authorizations, followed by Husky at 510.
Source: Petroleum news