Slashed oilpatch spending sets up price increases
30% drop in drilling
Claudia Cattaneo -- Financial Post
CALGARY - Canadian oil and gas companies are slashing capital spending and drilling plans for the remainder of this year and next, setting the stage for price increases down the road when natural gas inventories are used up, observers said.
In a revised activity forecast yesterday, the Canadian Association of Oilwell Drilling Contractors said it is now projecting a 30% decline in drilling activity for the second half of the year, compared to its previous estimate, made in April. Activity for the whole year will be 17% lower than previously expected, the group said in a news release.
Research compiled by FirstEnergy Capital Corp., to be made public next week and based on a survey of 40 Canadian producers, points to cuts in capital spending earmarked to find new natural gas reserves of between 20% and 40% next year compared with this year, as companies grapple with the sharp slide in North American natural gas prices that started last the spring.
Because the cuts will lead to tighter supplies, "You are setting yourself up for increased prices down the piece," said Martin Molyneaux, director of institutional research at FirstEnergy, an energy brokerage in Calgary. "They have only got so much cash flow they can allocate to generate returns on capital, and at the moment, the way they run their economics, they are not looking at gas."
October futures contracts for natural gas were down yesterday US0.034¢ at US$2.103.
High inventories ahead of the winter heating season have depressed natural gas prices to a quarter of last winter's levels, but Mr. Molyneaux said both Canada and the United States are facing huge declines in natural gas reservoirs that need to be replenished.
He said the recent erosion in natural gas pricing has not been driven by increased supply but rather by lower demand because of the slowdown in the North American economy.
The CAODC, which represents firms operating drilling and service rigs across Canada, said it now expects 17,300 wells to be drilled this year, compared to 19,455 under its previous forecast. It also expects the utilization rate of Canada's 640 rig fleet to drop to 64%, compared to 76% under its earlier estimate. The group attributed the decline to lower natural gas prices and problems accessing drilling locations.
It notes that even with the slowdown in activity, the year will still be a record one for Canada's drilling companies, which will be handling 800 more wells in 2001 than last year, resulting in a 5% increase.
Mr. Molyneaux said spending directed at finding and developing oil is likely be flat to up in 2002, reflecting the commodity's relative strength.
Most oil and gas producers firm up spending plans for 2002 at the end of the year.
nationalpost.com
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