MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, MAY 5, 1998 (3)
TOP STORIES
Producers Challenged To Fill New Pipelines
The Financial Post
Natural gas producers will have to drill and tie in more than 30,000 gas wells over the next five years to fill new pipeline capacity, says a report released yesterday by FirstEnergy Capital Corp.
Pressure to fill pipelines expanded by TransCanada PipeLines Ltd. and the Northern Border and Alliance Pipeline projects means producers must sustain a yearly drilling program that surpasses last year's record of 4,856 gas wells by as much as 1,500 wells a year from 2000.
"There's no question they're going to have to do a lot more [drilling] and for an extended period of time," said Martin Molyneaux, a Calgary analyst with FirstEnergy. He is optimistic that with an industry-wide shift toward natural gas from oil production, a balance between export capacity and production can be reached by late 2002.
However, producers are facing several constraints, not least of which is reduced cash flow and higher debt because of low oil prices.
TCPL announced last week it had filed an application with the National Energy Board for another $984-million pipeline expansion that will add 275 million cubic feet of natural gas a day by Nov. 1, 1999, to its system to Eastern Canada and the U.S. If this is approved, the company will have expanded capacity by 1.2 billion cubic feet a day since November 1996.
With Alliance's 1.3 billion cubic feet a day proposal, capacity will be at 2.7 billion cubic feet a day by November 2000.
Problems in the short term to fill the pipelines are "very, very likely," said Molyneaux. But he called TCPL's extra expansion a welcome confidence booster and said it will help push natural gas prices in the next five years to $2.50 to $3 a thousand cubic feet.
John Carruthers, TCPL's vice-president of strategic development, said the company is confident the Western Canadian basin can support the increase in capacity. "[Producers] will be busy, but it is sustainable."
Some industry observers said TCPL's move throws the need for Alliance into question and heightens concerns over whether producers can bring production on stream quickly enough.
"By 1999 we will have constructed the equivalent of an Alliance pipeline," said Gary Davis, a spokesman for TCPL.
Already the price differential between the spot price in Alberta and on the New York Mercantile Exchange is narrowing, eliminating one reason for the producer-backed Alliance project, he said.
Carruthers said TCPL's 1999 expansion plans were part of discussions recently when producers gave their blessing to its merger with Nova Corp. In return, Nova and TCPL agreed to back off their strong opposition to Alliance.
Davis said support for the 1999 expansion comes from shippers who were rooting for TCPL's $4-billion Nexus project, which was eventually nixed.
Nora Stewart, an associate with Sproule & Associates, said with about 329 trillion cubic feet of potential natural gas reserves, there will be enough production to feed all the new pipelines.
"But do we need Alliance? I think time will tell," said Stewart, who wrote a supply report for TCPL's application to the NEB.
NOVA Gas Pipeline Volumes Back On The Rise
NOVA Corp. unit NOVA Gas Transmission Ltd. said on Tuesday it had arrested a decline in natural gas flows on its Alberta pipeline system and volumes were on the rise.
NGTL volumes had dropped earlier by about 700 million cubic feet a day below its target of 12.8 bcf on Tuesday because of the effects of forest fires raging in northern Alberta.
"We think we've turned the corner," NGTL spokesman Scott Ranson said. "We're now adding gas faster than we're taking it off the system."
Deliveries into the system from gas fields and plants had dropped because of a series of power disruptions in fire-plagued regions. NGTL was also forced to shut in a pipeline near Slave Lake in northern Alberta as one blaze drew close to the facilities.
Ranson said the shortfall had yet to be made up, but all firm service deliveries had been made thanks to gas storage withdrawals.
Signs Of Renewed Optimism At Offshore Technology Conference
Canadian Press
Sluggish oil prices failed to dim industry outlook this week at the 30th annual Offshore Technology Conference, where all signs indicate that business is slowly on the upswing.
"With the relative stability of prices the last 10 years, the recent dip not withstanding, the industry is doing very well and I think that's being reflected in this year's conference," said conference spokesman Dan Lipsher.
About 1,500 companies are displayed their wares over about 28,000 square metres of Astrohall and Astroarena convention space, a 20 per cent jump in space from 1997.
More than 45,000 visitors are expected - the most in a decade - by the time the conference ends later this week.
Newfoundland Premier Brian Tobin and Nova Scotia Premier Russell MacLellan were among those attending the conference with delegates from their province.
MacLellan said Tuesday Nova Scotia recognizes it's the new kid on the block in offshore exploration and development, but the way the province is handling offshore royalties shows it's learning fast.
He said Nova Scotia's generic royalty regime for future oil and gas activity on the Scotian Shelf will be flexible enough to account for various technical and financial risks among offshore projects. Details will be announced shortly, MacLellan said.
"We appreciate that the petroleum sector needs the certainty that a generic regime provides before making investment decisions," he said.
"But we also recognize, equally, the importance of this new industry to the future of Nova Scotians. Our challenge is to put in place a royalty regime that encourages exploration and development while ensuring a fair share of rewards."
The Houston conference has always mirrored the industry it promotes.
In 1982, the conference was so big it spilled into the Astrodome and drew more than 100,000 people. Two years later, plummeting oil prices shrunk attendance to 2,773 with no exhibitors.
"It's slowly been building up since then," Lipsher said.
Many of the technological advances on display have made it economically feasible to to find and access deposits far below the ocean's surface.
"If you drill fewer dry holes, then you're bringing your cost down," said Bernie Stewart, president of Houston-based R and B Falcon Drilling Inc. and vice-chairman of the International Association of Drilling Contractors.
Innovations have made for the industry's brightest outlook in 15 years, Stewart said. Sixty-five new rigs are under construction, many of them suited for deepwater exploration.
"All the drilling, all the equipment is placed remotely," Lipsher said.
"It's deeper than any diver or even a submarine can go. The technology has really advanced and accelerated. There are places where they may have known there was oil and gas, but it might not have been economically feasible to go there."
The number of bids on deepwater Gulf of Mexico tracts has leapt from 140 in 1995 to a record 539 this year. Stewart said companies in his organization are investing more than $12 billion US in deepwater and anticipates 6,000 new related jobs.
Canadian Hunter Going Public
The Financial Post
It's unlikely Canadian Hunter Exploration Ltd., currently a unit of Noranda Inc., will be swallowed in a takeover when it goes public this summer, president Steve Savidant said yesterday.
That's because its major shareholder, EdperBrascan Ltd., plans to hold on to its 40% controlling interest, Savidant said. Another 30% of the shares are owned by institutions and the rest are widely held.
"They [EdperBrascan] very much like North American natural gas, and what they said to us is that they like what Canadian Hunter is doing, and our strategy for growing the company," he said.
EdperBrascan is a Toronto holding company that was formed last year through a merger of Edper Group Ltd. and Brascan Ltd., Noranda's longtime major shareholder.
Savidant said Canadian Hunter will become publicly traded after its shares are distributed as a special dividend to Noranda shareholders, which last fall decided to shed some of its units as part of a plan to return to its mining roots.
Canadian Hunter's sister company, Norcen Energy Resources Ltd., was sold to Houston based Union Pacific Resources Group Inc. in January as part of the same strategy.
The going-public transaction is expected in August following the conclusion of discussions with Noranda about various issues, including how much debt, tax pools and capital structure Hunter will inherit.
"What Noranda and Hunter have talked about is having a capital structure that allows it to proceed with its growth strategy. And both sides want to do that," Savidant said.
Those discussions are expected to continue for the next five or six weeks until a separation agreement is completed.
"We're looking at spending something more than our internally generated cash flow, and hope to have a balance sheet that will enable us to raise additional capital, probably through debt,'' he said.
Canadian Hunter is a large producer focused on western Alberta and northeastern B.C. Its daily production is 340 million cubic feet of natural gas equivalent daily -- 90% gas. It operates 85% of its production and it markets gas from its own and other sources.
In 1997, it had a capital spending program of $170 million, exceeding its cash flow by about 5%. Savidant said he expects the company to spend at least another $170 million this year and to have higher cash flow than in 1997.
He said Canadian Hunter performed poorly in the early 1990s, when its corporate focus was "elephant hunting," the oil industry term for high-cost, high-risk exploration activities that can sometimes pay off with large discoveries.
In 1995, he said, the company switched to lower-risk exploration and development strategy, and saw strong improvements in earnings and cash flow in the following two years.
Canadian Hunter's current growth strategy is based on adding new core areas, developing mid-stream operations such as pipelines and expand internationally. Canadian Hunter will likely seek to fund the expansion from sources other than cash flow.
Under the distribution, shareholders of Noranda will end up with the same proportion of ownership in Canadian Hunter, although they may receive a smaller number of shares.
Savidant said the company plans to list on the Toronto and Montreal stock exchanges.
Low Oil Prices Hurt Syncrude
Canadian Press
Sinking crude oil prices and a maintenance retooling in the first two months of 1998 have taken their toll at Syncrude Canada.
Revenue at the heavy oil giant fell 33% to $347 million during the first three months of 1998, compared to $528 million for the same period in 1997, the company said yesterday.
"Our financial performance suffered largely due to depressed crude oil prices," chairman and chief executive Eric Newell said in a statement.
With crude prices floating near nine-year lows, the premium commanded by heavy oil products makes them difficult to sell in a market flooded with cheap oil.
Syncrude plans to weather the storm by concentrating on its efforts to cut the costs of harvesting and refining bitumen, the sticky black tar that the energy industry has spent more than 20 years trying to develop.
Total unit costs for the first quarter were $18.88 per barrel compared to $14.12 per barrel for the same period in 1997, the company said.
Production costs for the quarter were $17.86 per barrel compared to $13.40 per barrel in 1997.
Operating cash flow was $75 million, $178 million less than the first quarter of 1997.
Net cash flow was a negative $25 million, compared to $173 million for 1997.
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