Oilpatch Predicts Drilling Collapse

[Jack]

-Thanks to a perfect storm of falling commodity prices, ravaged equity markets and higher royalties, Alberta`s outlook for conventional oil and gas exploration has never been so bleak in what is usually the busiest time of the year, industry observers say. "I think it`s (the economic downturn) really going to knock it flat," says Steve Hager, an exploration analyst with Calgary-based Discovery Inc., which produces geological studies and in-depth analysis of exploration trends in Western Canada. Hager characterized 2008 as bust-to-boom-back-to-bust again as both oil and natural gas hit new peaks and then abruptly fell off. After testing US$35 a barrel during the holidays, oil prices rebounded back above $40 on December 29, closing at $40.02.Natural gas for January delivery, meanwhile, bounced back above $6 per million British thermal units on the New York Mercantile Exchange but remains well below what many analysts consider to be the marginal cost of production of about $7.50. -According to Gary Leach, president of the Small Explorers and Producers Association of Canada, small-cap juniors account for the lion`s share of conventional exploration, drilling two-thirds of the higher risk wells in any given season. Juniors that drill 40% of all the wells in Western Canada probably won`t manage 25% this year, he added. "Right now it`s way cheaper to buy gas and oil on the stock market than to go drill for it." Although global economic chaos is precluding many smaller companies from raising the cash they need to grow, Leach said the writing was on the wall even as oil prices were hitting all-time highs in July. He further blamed the Alberta government`s flip-flopping on royalties for scaring away speculative investors that fund higher risk exploration efforts. "We were already trending to 10-year lows long before the financial market collapse," he said. "That was just the icing on the cake. -Meanwhile, Alberta`s land sales, considered a leading indicator of future exploration and development activity, fell to multi-year lows. According to the Calgary-based Daily Oil Bulletin, sales of oil and gas rights by area were the lowest since 2004. Alberta took in about C$1.3 billion from the twice-monthly auctions, a far cry from $3.4B in 2006. The dollar total was roughly the same as Saskatchewan`s even though Alberta`s oilpatch is five times larger. In BC, producers put up more than $2.6B for exploration and development rights, the highest in its history. Leach notes that oil and gas is a relatively smaller contributor to each of those provinces compared to Alberta, which is more dependent on energy revenues. Where Alberta used to represent 80% of Canada`s oil industry, Leach says that figure has fallen to about 60% in the past year, due mainly to the looming royalty changes that officially take effect January 1. Royalties, along with low prices, prompted big spenders like EnCana, Canadian Natural Resources and Husky Energy to cut 25 to 30% from their capital budgets, but Leach estimates that figure is closer to 50% for smaller juniors, resulting in cuts of $5B to $6B next year.

-In the US industry estimates a few months ago -- only weeks after North American rig numbers peaked at 2,449 in September, a 23-year high--were for a decline of 400 to 500 rigs in 2009. That now looks like far too shallow a trough, with analysts expecting at least 700 US rigs to be "stacked" before energy prices possibly start to recover, along with the economy, late next year. The North American rig count stood at 2,352 in November, according to figures from oilfield services company Baker Hughes Inc. Separately compiled weekly figures showed a decline of at least another 250 or so in December.

(Calgary Herald 081230, 090105)

 

[ReX357]

QUOTE (Jack @ Jan 5 2009, 12:30 PM) -Thanks to a perfect storm of falling commodity prices, ravaged equity markets and higher royalties, Alberta`s outlook for conventional oil and gas exploration has never been so bleak in what is usually the busiest time of the year, industry observers say. "I think it`s (the economic downturn) really going to knock it flat," says Steve Hager, an exploration analyst with Calgary-based Discovery Inc., which produces geological studies and in-depth analysis of exploration trends in Western Canada. Hager characterized 2008 as bust-to-boom-back-to-bust again as both oil and natural gas hit new peaks and then abruptly fell off. After testing US$35 a barrel during the holidays, oil prices rebounded back above $40 on December 29, closing at $40.02.Natural gas for January delivery, meanwhile, bounced back above $6 per million British thermal units on the New York Mercantile Exchange but remains well below what many analysts consider to be the marginal cost of production of about $7.50. -According to Gary Leach, president of the Small Explorers and Producers Association of Canada, small-cap juniors account for the lion`s share of conventional exploration, drilling two-thirds of the higher risk wells in any given season. Juniors that drill 40% of all the wells in Western Canada probably won`t manage 25% this year, he added. "Right now it`s way cheaper to buy gas and oil on the stock market than to go drill for it." Although global economic chaos is precluding many smaller companies from raising the cash they need to grow, Leach said the writing was on the wall even as oil prices were hitting all-time highs in July. He further blamed the Alberta government`s flip-flopping on royalties for scaring away speculative investors that fund higher risk exploration efforts. "We were already trending to 10-year lows long before the financial market collapse," he said. "That was just the icing on the cake. -Meanwhile, Alberta`s land sales, considered a leading indicator of future exploration and development activity, fell to multi-year lows. According to the Calgary-based Daily Oil Bulletin, sales of oil and gas rights by area were the lowest since 2004. Alberta took in about C$1.3 billion from the twice-monthly auctions, a far cry from $3.4B in 2006. The dollar total was roughly the same as Saskatchewan`s even though Alberta`s oilpatch is five times larger. In BC, producers put up more than $2.6B for exploration and development rights, the highest in its history. Leach notes that oil and gas is a relatively smaller contributor to each of those provinces compared to Alberta, which is more dependent on energy revenues. Where Alberta used to represent 80% of Canada`s oil industry, Leach says that figure has fallen to about 60% in the past year, due mainly to the looming royalty changes that officially take effect January 1. Royalties, along with low prices, prompted big spenders like EnCana, Canadian Natural Resources and Husky Energy to cut 25 to 30% from their capital budgets, but Leach estimates that figure is closer to 50% for smaller juniors, resulting in cuts of $5B to $6B next year.

-In the US industry estimates a few months ago -- only weeks after North American rig numbers peaked at 2,449 in September, a 23-year high--were for a decline of 400 to 500 rigs in 2009. That now looks like far too shallow a trough, with analysts expecting at least 700 US rigs to be "stacked" before energy prices possibly start to recover, along with the economy, late next year. The North American rig count stood at 2,352 in November, according to figures from oilfield services company Baker Hughes Inc. Separately compiled weekly figures showed a decline of at least another 250 or so in December.

(Calgary Herald 081230, 090105)


Ouch! That hurts.

 

[retiredby50]

From listening to reports, and talking to friends in the industry, I think it`s all about the royalty thing.

Sorry if I`m light on details here, but on CBC radio the other day they were talking to an oil industry guy, from Calgary I believe. He said we`ve lost over 160 rigs in the last XXX months. They weren`t shutting down and going home, rather they had gone either to Sask or B.C. he blamed the royalty issue for the shift.

Anecdotally, a friend drives hoe for a service company, after years in northern Alberta, all of a sudden, all their work is being done in Sask. He blames the royalty issue, citing that if it were the economic situation, Sask and BC would be dead too. I don`t know if there`s any merit to this comment, but he also said that Alberta was pretty much `drilled out,` and that the other two offered fresh, untapped fields.

The oil industry hasn`t `collapsed,` it has merely shifted locations.

...and so it goes.

Keith

 

[Mitch Collins]

Yet at the same time, year ending 2008 saw BC`s land right sales at more than $2.5 BILLION, which is over QUADRUPLE what the last record was for the record drilling years in 2005 and 2006.

Just thought that I`d throw that out there...drilling will be happening, but perhaps more on the NE BC side. Land sales have been absolutely staggering in light of the natural gas discoveries in Dawson Creek, Fort St. John and Fort Nelson.

Couple that with the more profitable royalty regime..there is a reason I keep investing in this area! Also, it is important to recognize that `exploration` areas go through different phases.

First, an area like Fort St. John needs to go through a long drilling boom (as it already has) to build a strong service industry. Given that the typical well will produce anywhere from 8 - 15 years (sometimes MUCH more), drilling exploration is only one facet of the economy of the region. After thousands of wells have been drilled, they all need continual work, ie pipelines, facilities and batteries built, scrubbers, gas plants, etc. This work is where the REAL money is spent, not just on new exploration.

Not to mention the entire well servicing industry (which is probably more crucial to NE BC right now than new drilling) such as service rigs to replace pumps, casing, etc. Then we have wireliners, testers, fluid haulers, well operators, etc etc.

Just wanted to enforce that if drilling just stopped, the companies still need to maintain the HUGE amount of wells that are currently online. That is what makes `fringe` areas like Fort St. John and Dawson Creek a lot more stable than some people perhaps think - service industry is larger than the exploration industry at this point, in my opinion. (And I`ve worked in the oil patch and know a fair number of fairly high level players in the patch in the area)

That, plus NE BC has been incredibly insulated from the price drop in Alberta (all 30 units I run are worth the same or very slightly more than they were a year ago...some have actually increased fairly substantially), and CMHC reports predict that Dawson Creek/Fort St John will be the only areas to avoid price collapses, and we are actually set to see a very modest increase, while Edmonton, Calgary and Alberta at large has seen a rather large average price drop.

Jack, I agree with your `reality` thinking, but wouldn`t you also agree that perhaps there is some opportunities in some areas?


Just wanted to add my $.02 to show some people that there is still opportunities available out there, but you have to look MUCH harder than in the past few years to make viable investment decisions.

Good Luck!

Mitch

 

[GlennLasiuta]

Nicely stated, Mitch. Also to note, from another person who has actually WORKED in the oil/gas sector for many winters in -40C (read, on the front lines and not in some office downtown Calgary), is the fact that most companies in this sector bring workers (read, tenants in many cases) in from Alberta.

When drilling, service or new facility construction slows in Alberta, we don`t hit the welfare line, we pack up and go to northern BC or Saskatchewan for the winter, or the duration of the project. Note that these areas have their own permanent strong workforce as well, and the easiest way to top it off, is to hire us Albertans.

We don`t necessarily move to the areas just becaues the newspaper said 100 (example) new wells are being drilled. We continue to live in the area we always have (Alberta in this case) and work where there is work.

An old oilfield adage goes `you rarely ever live where you work`. It`s great that new fields are being developed elsewhere, plus, as Mitch stated, facilities need to be maintained, and let me tell you that I`ve spent upwards of 2 years on a single maintenance project NOT in my home town when I was a renter... Perspective and my 2 cents.


Thanks,

Glenn

QUOTE (MitchCollins @ Jan 8 2009, 12:44 PM) First, an area like Fort St. John needs to go through a long drilling boom (as it already has) to build a strong service industry. Given that the typical well will produce anywhere from 8 - 15 years (sometimes MUCH more), drilling exploration is only one facet of the economy of the region. After thousands of wells have been drilled, they all need continual work, ie pipelines, facilities and batteries built, scrubbers, gas plants, etc. This work is where the REAL money is spent, not just on new exploration.

Not to mention the entire well servicing industry (which is probably more crucial to NE BC right now than new drilling) such as service rigs to replace pumps, casing, etc. Then we have wireliners, testers, fluid haulers, well operators, etc etc.

Just wanted to enforce that if drilling just stopped, the companies still need to maintain the HUGE amount of wells that are currently online. That is what makes `fringe` areas like Fort St. John and Dawson Creek a lot more stable than some people perhaps think - service industry is larger than the exploration industry at this point, in my opinion. (And I`ve worked in the oil patch and know a fair number of fairly high level players in the patch in the area)

 

[klewlis]

what are the rental markets like in Dawson Creek (my hometown!) and FSJ? I just did a quick search and prices in DC seem to be just slightly lower than Edmonton... I would have expected them to be cheaper, but I guess the town is growing. What`s the vacancy rate?

 

[Mitch Collins]

QUOTE (klewlis @ Jan 8 2009, 03:33 PM) what are the rental markets like in Dawson Creek (my hometown!) and FSJ? I just did a quick search and prices in DC seem to be just slightly lower than Edmonton... I would have expected them to be cheaper, but I guess the town is growing. What`s the vacancy rate?


Great Question!

The markets are quite similar. CMHC notes the vacancy rate is much lower in Dawson Creek than in Fort St. John, but this is the perfect example of when you need to look behind the statistics. (I believe CMHC stated DC vacancy was less than 1% while FSJ was nearly 9%) Rents in FSJ are notably higher than in DC, however DC is starting to catch up. If you look at a CMHC rent guide, you will see that Fort St. John and Dawson Creek typically have the highest rents in the province right after Vancouver and Victoria, while the prices here are nearly half of what they are in those areas. (And average incomes are doubling at more than twice the provincial average, and in-migration to these areas is also more than double the Provincial average as well..good to know!!)

In 2005-2006, Fort St. John was booming incredibly. So much so, that we had a full on housing CRISIS in the area. While I was just starting with investing at the time, we had many many people in dire straights who needed places to live. People with great paying jobs!

There was simply 0% vacancy, and people were sleeping in cars, etc. That being said, Fort St. John absolutely boomed in terms of multi-family housing starts and new hotel construction.

Over the course of the past 2 years, we have had over 900 (approximately) new apartment building suites enter the market, and 3 large hotels, with 2 more being built. This is a HUGE addition to a town with only 15,000 people. Not to mention the huge build up of residential homes..

Then the market took a breather and the activity came down from record highs at a time when these units were all being completed. The reason for the CMHC vacancy increase stat is mainly due to the time it will take for these units to be absorbed into the market. People are leaving their old apartments for the new ones, etc.

We run 22 units in Fort St. John, and have had absolutely 0% vacancy in the past 3 years, with a base of people applying to get into our units, we get top notch equity building tenants.

Fort St. John is also getting a new Hospital, new Fire Hall, new large Multiplex (Olympic sized speed skating oval and event venue), large strip mall with big box stores all in varying stages of development right now! The infrastructure investment is absolutely huge.

Dawson Creek is about 30 minutes away from Fort St. John, and does not have even close to the service industry that Fort St. John does. There has been 2 new hotels built, and some residential, but nothing like the contruction that has occured in FSJ.

Both markets are good, but I personally like Fort St. John much more as an investment town (I do live and work here too). There is NO PROPERTY MANAGEMENT in Dawson Creek at all, making this a town that most REIN members will leave 100% alone.

FSJ on the other hand is full of REIN people! But even property management companies (2 of them) in FSJ are horrible and the reason for our success has been due to the fact we manage our own properties and treat our tenants like gold.

Anyway..hope that helps you understand the market a little

 

[klewlis]

thanks for the info, Mitch! The area interests me since I grew up there and of course it has been experiencing a lot of new growth. There don`t appear to be any/many new apartment buildings in Dawson, which might help explain the low vacancy too. A couple of guys I went to highschool with are realtors there now... so I know who to go to if I ever decide to buy there!