Drilling dries up /exploration spending slowsBUSINESS TICKER: OIL AND GAS
POSTED ON 13/04/07
Drilling dries up as exploration spending slows
NORVAL SCOTT
CALGARY -- Extremely low demand is continuing to pose severe problems for Canada's oil and gas drilling companies, with the number of rigs in service for the time of year at its lowest since 2002.
According to the Canadian Association of Oilwell Drilling Contractors (CAODC), only 128 rigs out of the 881 operating in Western Canada were active for the week ending April 10, compared with 236 active rigs at the same time last year. The numbers make grim reading for the drilling industry, with operating conditions unlikely to improve any time soon, according to analysts.
"These are the lowest utilization levels we've seen in a long time, and are a symptom of lower spending by exploration companies," said John Tasdemir, analyst at Calgary-based Tristone Capital. "There's not many firms ready to spend money to get rigs working, and the rig count in 2007 won't get anywhere near the levels we saw last year."
Drilling firms have been going through a tough patch in recent months, as a relatively warm North American winter reduced the amount of natural gas used for heating. Consequently, Canadian gas producers diverted their cash flows away from gas exploration and toward other opportunities, such as share buybacks, slashing drilling demand -- a problem compounded by the government's decision to tax income trusts, a move that reduced the exploration budgets of energy trusts and also junior energy firms
The lack of demand has hit the drilling companies hard, especially as they've been increasing the size of their rig fleets over the past five years because of buoyant market conditions. Adding to their problems, breakup season -- the winter thaw of ice and snow that effectively ends winter drilling -- arrived two to three weeks earlier than normal this year, curtailing drilling operations even more.
"The outlook for utilization rates is very bleak," said Kevin Lo, analyst with Calgary-based FirstEnergy Corp. "Producers have a lack of confidence in the markets at present, so no one has an overriding desire to drill right now."
As companies have now set their exploration budgets for the year, there's unlikely to be any significant improvement until firms revisit their plans in September, he added.
That estimate is supported by forecasts from the CAODC, which expects rig utilization rates in the second quarter of only around 25 per cent in the second quarter and 45 per cent in the third. If those projections are correct, over half of Canada's rigs will essentially be inactive until October.
"Performance over the year so far doesn't augur well for the second and third quarters," said Don Herring, CAODC president. "We're very unlikely to see an immediate turnaround given current utilization levels."
While the outlook for near-term drilling activity remains weak, an improvement in oil and gas prices -- normally closely correlated to rig activity -- means the sector may nevertheless be turning a corner, said Angela Guo, analyst at RBC Dominion Securities Inc., in a report.
"Commodity prices, if sustained, together with reduced services prices and improved industry efficiency, should ensure a recovery in drilling activities later in 2007 or early 2008," she said.
Western Canada Oil and Gas rigs
Year Active Rigs Inactive Rigs Total
2007 128 753 881
2006 269 235 792
2005 198 530 728
2004 191 502 693
2003 199 469 668
SOURCE: CAODC
https://www.theglobeandmail.com/servlet/story/LAC.20070413.RDRILLING13/TPStory/?query=drilling