The high season for Canadian drilling should begin now, but many Canadian operators plan to scale back operations. Depressed commodity prices, increased opera- tions costs, and the new Alberta royalty program all hurt drilling activity north of the US border. Drilling

Due to commodity price (and industry) pressure, the Alberta government recendy announced a transitional, lower royalty for new wells drilled after Nov. 18, 2008, but this will probably have litde effect on operators' plans to drill (OGJ Online, Dec. 17, 2008).

In response to a Nickle's Energy Group poll, 51% of respondents said their companies would still "decrease its capital budget for drilling in Alberta in 2009 because of low commodity prices, weak capital markets and higher Alberta royalties."

In November and December, Canadian Natural Resources, EnCana Corp., Imperial Oil, Petro-Canada, Royal Dutch Shell PLC, and Suncor Energy announced delays of various projects in Canada. Some processing projects were canceled outright.

Top Canadian drilling rig operators in December were EnCana (43 rigs), Husky Energy Inc. (30), ConocoPhillips Canada Ltd. (27), Talisman Energy Inc. (23), and Shell (18), according to Nickle's Rig Locator.

Fig. 1

AVERAGE 2007 OPERATING COSTS, WCSB*

CAPP forecast

The Canadian Association of Petroleum Producers represents more than 95% of Canada's upstream oil and gas industry. In November, Greg Stringham, vice-president of markets and fiscal policy, presented CAPP's 2009 outlook and drilling and investment forecast. He said Canada is the world's third largest natural gas producer and seventh largest crude oil producer, but production has been by the downturn in global oil new supply discoveries (North American shale gas; Bakken oil), financial market instability, and royalty changes in Alberta.

Stringham noted a regional shift in focus in Western Canadian Sedimentary Basin (WCSB) provincial Crown land sales from 2007 to 2008. Investment in British Columbia and Saskatchewan surged 400- 500%, while Alberta investment dropped or remained flat.

Western Canada natural gas production continues to decrease. This averaged 15.8 bcfd in 2008. down from 16.4 bcfd in 2007 and 16.8 bcfd in 2006.

This Chicago Pneumatic CP50 rig was working through winter in the US (Fig. 2; photo by Dennis McLeod, provided by Major Drilling Group International Inc.).

CAPP is forecasting $43 billion (Can.) in Canadian oil and gas investment spending in 2009, down from about $50 billion/ year in 2006-07. In particular, spending on oil sands is expected to drop about 20% to $16 billion in 2009, and spending in the WCSB will drop to $25 billion from about $29 billion spent in 2008.

About 16,000 wells were drilled in western Canada in 2008; CAPP expects only 14,700 wells in 2009, an 8% decrease.

CAODC forecast

The Canadian Association of Oilwell Drilling Contractors estimates 14,325 wells will be drilled in western Canada in 2009, based on 9 drilling days /well and rather high commodity prices: $99/ bbl (Can.) for WTI crude and $7.30/Mcf (Can.) for AECO gas, about double the prices in mid-December 2008.

CAODC sees an active fleet of 880 rigs and 55% utilization in first-quarter 2009, dropping to 17% in second quarter, rising to 40% in third quarter, and 45% in fourth quarter, for a average 39% utilization in 2009. CAODC puts 2008 utilization at 42%.

Trends

Operators and drilling contractors reported significant cost inflation in materials, fees, and labor rates.

Calgary-based Ziff Energy Group announced two major studies at the end of 2008. The 15th edition of its Western Canadian Sedimentary Basin study assessed upstream operating costs and production reliability, based on 32,500 producing wells in 300 fields. The study base produced 4.9 bcfd natural gas and 340 million b/d of conventional oil.1

Ziff found that weighted average unit costs increased 6% to $0.97/ MMcfequivalent in gas fields and increased 11% to more than $11.70/ boe in oil fields. The main drivers were increased service and energy costs. Fig. 1 shows the relative significance of various factors affecting average operating costs.

Ziff announced the launch of a new SAGD drilling and cost benchmarking study in September 200 8.2 The study will analyze and benchmark the cost of 160 SAGD horizontal well pairs and more than 2,000 core wells.