Uncertainty clouds fundamental strengths of Canada's industry - 1998 forecasts for the Canadian oil and gas industry - Industry Overview

World Oil, Feb, 1998 by Robert Curran

Yet, even with all of these factors putting downward pressure on drilling, the base line of activity for 1998 appears to be strong. The news from fourth-quarter 1997, furthermore, wasn't all bad. The massive, C$6.4-billion (US$4.5 billion) Hibernia project off Canada's east coast was launched successfully earlier in the year, and went onstream Nov. 17, one month ahead of schedule.

Ironically, the weakness of the Canadian dollar versus its U.S. counterpart has breathed some life into the industry, as the bulk of Canada's oil and gas exports are shipped southward. Being paid in American dollars cushions the blow of low commodity prices somewhat, although any significant increase in interest rates by the Bank of Canada to offset the Canadian dollar's slide could curtail that advantage.

DRILLING/LAND SALES

The pace of activity for most of 1997 was nothing less than frantic. Official drilling totals are not yet available, but based on the number of well licenses issued by the provincial governments, the final total will be approximately 16,000 wells drilled, about 10% higher than 1996, which held the previous record.

The provincial governments of Alberta, Saskatchewan and British Columbia also reported that 21,115 wells were licensed in 1997, up 32% from the 16,012 licenses issued in 1996. In Alberta, alone, 15,420 licenses were issued in 1997, a record for the second consecutive year.

Most projections of 1998 activity, prepared in the September-to-October timeframe, indicated drilling would be very close to 1997 levels. The Canadian Association of Petroleum Producers (CAPP), for example, has not yet revised .its initial projection of 16,014 wells for the year ahead. However, given current market conditions, a better target is likely in the range of 14,500 to 15,000 wells. Should the lower forecast number hold, 1998 would still end up as the second-best year.

Last year, oil wells comprised 52.2% of drilling, and gas wells totaled 29.4%. Exploratory drilling represented 19.9% of total wells drilled. Development drilling is expected to carry the load again in 1998, as producers focus on lower-risk, lower-cost prospects to offset the high-cost environment. There is some debate as to whether gas drilling will increase in anticipation of the November target date of 1.1 Bcf in expanded pipeline capacity coming onstream. However, there is still a substantial amount of gas shut in, so producers could ramp up production very quickly if the need should arise.

World Oil's survey of 25 Canadian producers (whose drilling represents close to 30% of Canadian activity), also indicates 1998 will be a very good year for drilling. The survey participants are planning to drill 6.5% more wells in 1998, from 4,380 to 4,663. By extension, more than 17,000 wells would be drilled in 1998, in contrast to CAPP's projection, which currently shows little or no change. For the past three years, the World Oil survey has consistently shown producers on a more aggressive drilling schedule than CAPP. Last year, the survey indicated drilling would increase by nearly 20% (actual increase was 16%), while CAPP predicted a slight decrease.