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

Survey participants continue to show a preference for oil drilling, with slightly less than 20% of wells targeting natural gas in 1998. Last year, the ratio was 27%. Clearly the pipeline export capacity shortfall has put a damper on gas drilling, at least in the short term. Among survey participants, Alberta will see only a 0.5% increase in activity, to 3,471 wells, whereas activity in Saskatchewan is forecast to jump by nearly 33%, to 1,048 wells. British Columbia and Manitoba are expected to remain relatively flat.

Onshore activity in Newfoundland has been overlooked often recently, with most of the attention on the East Coast's burgeoning offshore industry and big-ticket projects, such as Hibernia field. However, the province's onshore potential has sparked the interest of some big oil companies, most notably PanCanadian Petroleum and U.S.-based Hunt Oil, but with poor results. But as the bigger companies have lost interest, a group of juniors, have taken up the hunt as well.

Last year's high activity levels created a difficult problem for many producers in Western Canada. Because the drilling contractors ran fiat out for most of 1997, a substantial number of producers had difficulty booking rigs for their drilling programs. Some of the more active drillers have taken to booking high-demand rigs for several years in advance to ensure their drilling will take place. Yet, many of the less-active producers have been left with money to spend, but no means to get a rig to the well site.

In response, drilling contractors swelled the rig fleet by 9.9% in 1997, to 509 rigs. An average 419 of these were working over the course of the year, according to the Canadian Association of Oilwell Drilling Contractors (CAODC). The 82% utilization rate was the highest on record. In 1996, an average 316 rigs were under contract, equal to a 63% utilization rate. Given the level of activity, drilling contractors have been busy building new rigs. For 1998, CAODC forecasts that the fleet will swell to 558, with an average 429 rigs working, or a utilization rate of 77%. Drillers clearly are anticipating another big year, which suggests that World Oil's survey is not far off the mark.

Because so many producers were unable to drill their wells on schedule (or at all) in 1997, it is possible they will take up any slack that occurs in 1998 to ensure that they don't get caught again. If so, drilling levels should remain strong throughout the year. The most noticeable change is likely to be a shift to gas drilling if oil prices remain soft.

Drilling activity has been brisk in first-quarter 1998, so far. It remains to be seen if the pace will continue. However, based on 1997 land sale results, a key indicator of future activity, 1998 will be a very busy year. One area of concern for the drilling industry and the service/supply sector is the continued shortage of skilled workers. Training centers in Alberta are running flat out. Demand for their services is likely to continue rising.