Total Energy Services Inc T.TOT

drilling activity-bid 2.00/ask 2.04

[robhenry]

Interesting article on ng pricing and drilling outlook. U.S. cold weather means hotter natural-gas market Drilling pendulum beginning to swing other way as demand ups, supply dwindles Gary Lamphier The Edmonton Journal Monday, December 16, 2002 ADVERTISEMENT For natural-gas producers, it's deja vu all over again. And for drillers, it's time to gear up for what promises to be a frenetic first quarter, after a disappointing 2002. Two years after natural-gas prices soared to record all-time highs -- reaching roughly $9.50 US per million British thermal units on the New York Mercantile Exchange -- prices are skyrocketing once again. NYMEX gas prices shot up another 20 cents Friday to close at $5.28 per million BTUs, a new 19-month high. That's nearly double the price levels of last summer, when NYMEX gas fetched well under $3 per million BTUs. Spot prices in Alberta are also up sharply, closing Friday at $6.05 per gigajoule. That's a three-fold increase from the rock-bottom lows of last summer. And the uptrend, which has accelerated in recent weeks, is likely to continue. Analysts say the price spike is being driven by a combination of factors, including rapid U.S. inventory drawdowns, unusually cold weather over much of the U.S. -- in sharp contrast to Alberta's balmy temperatures -- and continued declines in natural-gas production levels. "A lot of the U.S., certainly the major population centres, have been colder than normal -- about eight per cent colder than normal for the whole U.S., on a gas-customer weighted basis. And we're seeing that (reflected) in the gas storage data," says Martin King, commodities analyst with FirstEnergy Capital, in Calgary. According to U.S. Energy Department data, U.S. natural-gas inventories dropped a surprisingly steep 5.5 per cent in the latest week, as heating demand jumped. "It's a very robust number," Kyle Cooper, a Houston-based analyst at Salomon Smith Barney, told Bloomberg News. "It indicates some tightness in the supply-demand balance. Combined with the weather forecast, you're looking at a bullish outlook." Analysts say the price spike also reflects pivotal changes in the natural-gas supply-demand picture. In fact, 2002 is beginning to look like a pivotal year for the North American natural-gas business. For the first time since 1986, Canadian gas exports to the U.S. and total gas production from Western Canada are likely to decline on a year-over-year basis, says Calgary's Peters & Co., in a recent research report. After 15 years of steady growth, net exports peaked at 9.65 billion cubic feet of natural gas a day in 2001, says Peters. But it's been downhill since. Through August, net exports were down about four per cent, says Peters, based on data from the National Energy Board. Same story on the production side. Output of western Canadian natural gas peaked at 22 billion cubic feet a day in December of 2001. By July of 2002, it had fallen to 19.8, a decline of 10 per cent. Peters expects final figures will show average production rates for 2002 will come in around 20.0 billion cubic feet a day, for a decline of three per cent versus 2001. Since more than half of Canada's gas production is exported to the U.S., accounting for about 17 per cent of U.S. consumption, the declines are having a direct impact on U.S. prices and storage levels. "It's certainly a very loud wake- up call," says FirstEnergy's King. "We saw indications of this happening in the previous spike of 2000-2001 and I think we're starting to see it come to the forefront again." Sluggish drilling activity levels and unexpectedly rapid decline rates at major natural-gas fields such as Ladyfern, along the B.C.-Alberta border, have also cut supplies and pushed up prices. But the pendulum is starting to swing the other way, as gas producers respond to sharply higher gas prices and gear up their winter drilling programs. "Certainly the number of rigs running has picked up. This week we've got 419 (or 63 per cent) running out of a fleet of 663," says Don Herring, president of the Canadian Association of Oilwell Drilling Contractors. "We're calling for an average of 564 rigs to run in the first quarter, or 85 per cent. And that's just the average. It would peak higher than that." Peters & Co. predicts a total of 16,500 wells will be drilled in 2003, with gas wells making up about 60 per cent of the total. CAODC's forecast calls for about 17,500 wells in 2003, up from about 14,300 this year. [e-mail] © Copyright 2002 Edmonton Journal More activity will surely translate into higher day rates. JMVHO LOL longs rob