Dismal drilling outlook gets worse

CALGARY — A group that represents Canadian oil and gas drillers is revising its already grim 2009 forecast to reflect an even bleaker outlook for the industry.

The Canadian Association of Oilwell Drilling Contractors is predicting 22 per cent fewer wells will be drilled in Western Canada this year than it called for in its October forecast.

“Activity levels have been low enough that we’re not tracking onto a 2009 forecast that was fairly pessimistic to begin with,” association president Don Herring said in an interview Friday.

He said it’s the first time in his 25-year tenure at CAODC that a forecast has been revised in mid-winter, typically the busiest time of year for natural gas drillers.

The group released a report Friday predicting 11,176 wells will be drilled in 2009, well below the 14,325 it forecast in the fall and half 2005 and 2006 levels.

Natural gas prices sunk below US$4 per 1,000 cubic feet on the New York Mercantile Exchange Friday — about half of what most producers would need to make their drilling economically viable.

As well, a freeze in credit markets has taken a big toll on the industry, Herring said.

The Alberta government has moved to mitigate the effects of royalty changes that came into effect Jan. 1 and is in the process of consulting with industry and the financial community about an incentive program for smaller energy firms.

“These are things we expect to bring forward in short order,” said Alberta Energy spokesman Jason Chance.

Herring’s group met with Alberta Energy Minister Mel Knight on Friday to give some input on what should be included in the incentive program.

“You can kind of dress it up any way you want and describe it as some kind of a tax credit, or an incentive.

“But essentially for activity to increase, the royalty take has to go down,” Herring said before the meeting.

BMO Capital Markets analyst Mike Mazar said there’s little the government can do — aside from direct subsidies to natural gas drillers — that would help in any significant way.

“Royalties could be zero and there wouldn’t be any activity,” he said.

Like Herring, Mazar said 2009 is turning out to be far worse than he had expected as recently as the fall — and there’s no reason to believe the gloom will subside in the near future.

Joining the growing list of firms scaling back, Calgary-based oil and gas driller Peak Energy Services Trust (TSX:PES.UN) said Thursday it would reduce its workforce by 15 per cent, cut salaries and force employees to take unpaid days off.

The Petroleum Services Association of Canada predicted last month a 21 per cent decline in drilling activity from 2008 levels — a more severe downturn than the 10 per cent drop it called for in its November outlook.

The group is now pegging the number of wells drilled in Canada this year at 13,500, compared with the final 2008 tally of 17,043.

“The overall well count is falling almost quicker than we can forecast,” said PSAC president Roger Soucy.