Mike Ratuski
Canadian Petroleum Association
Calgary
The year 1991 was not a great year for Canada's upstream oil and gas industry.
The financial results have not yet been compiled, but the expectations are that the industry will be showing a loss of well over $1 billion and will be surpassed only by the $1.9 billion loss in 1986.
This performance resulted in the restructuring activities within the industry being intensified. Companies have been streamlining their operations to enhance operating efficiencies and control costs. They have been disposing of properties and focusing on their core production.
About $4 billion worth of producing properties are still on the market today. As part of this process a great deal of experience has left the industry, with layoffs from the operating companies approaching 10,000 in the past 2 years.
The drilling and service sector suffered even greater losses, and many companies went out of business. Since the oil price collapse in 1986, some 35,000 have lost their jobs in these two sectors.
DRILLING ACTIVITY
Oil and gas drilling activity in Canada in 1991 reflected the state of the industry, with total completions at 5,539 wells, down 8% from 1990 and the lowest level in 16 years.
The only growth area was the doubling in horizontal drilling to 208 wells. The drilling sector, which requires a rig utilization rate of 55% to break even, averaged only 31% in 1991.
There was some drilling on the East Coast offshore, mostly on the Panuke/Cohasset project off Nova Scotia, which is expected to come on production later this year. Two other offshore wells-Thorvald P-24 and Botwood G-89-were dry and abandoned.
The industry focus switched back to oil in 1991, with 55.6% of all successful wells completed as oil producers, compared with 47.7% in 1990.
Gas well completions were down 25% from last year, primarily as a result of the continuing slide in natural gas prices and marketing limitations. Exploratory drilling dropped by 18%, whereas development drilling was unchanged.
In November 1991, Alberta announced a royalty holiday program for new crude oil wells in an attempt to revive the sluggish drilling activity. This program is scheduled to expire in March 1993.
The expectation for 1992 drilling activity is a further decline of about 20% from last year's level. Both crude oil and natural gas prices are down again this year, further aggravating the industry's declining cash flow.
KEY PROJECTS
The Hibernia oil field development offshore Newfoundland, which was well into the construction phase last year, suffered a setback in February this year when a 25% partner, Gulf Canada, announced it was pulling out of the project.
The remaining partners then decided to slow construction and cut daily expenditures of $3 million in half. This slowdown would delay completion of the $5.2 billion project by a year, into 1997. The remaining partners-Mobil, Chevron, and Petro-Canada-are currently looking for investors to take up the 25% interest.
With the installation of two platforms successfully completed, the scene is set for Canada's first commercial offshore production in June. Managed by Lasmo Nova Scotia, the Panuke/Cohasset project is a small development and does not compare in size with Hibernia.
Because of its small size, Lasmo and its partner, Nova Scotia Resources, had to ensure low front end capital costs$200 million-and extensive leasing for the jack up, the storage tanker, and the shuttle tanker.
To keep operating costs down, production will be seasonal and depend on sea conditions. Initial production will be from Panuke, while Cohasset will be phased in after 1992 once all the Panuke wells have been completed.
Seasonal production is expected to average between 30,000 and 40,000 b/d of condensate.
In western Canada two megaprojects will complete the construction phase and enter commissioning by yearend. The magnitude of the capital expenditures for these two developments softened the impact of the recession on the Alberta economy.
The $1.6 billion biprovincial upgrader located at Lloydminster at the Alberta-Saskatchewan border will process 40,000 b/d of bitumen and conventional heavy oil and upgrade it into synthetic light crude. The project is a joint venture between Husky Oil and the Alberta, Saskatchewan, and federal governments.
Shell Canada's $1 billion Caroline gas field development is on schedule and on budget. Construction activity has peaked and will drop off this fall as the complex gas processing facilities move into the commissioning phase. The plant will produce 4,000 metric tons/day of sulfur, 28,000 b/d of gas liquids, and 90 MMcfd of sales gas.
PRODUCTION TRENDS
Light and medium crude oil production continued its decline but was offset by record production of synthetic crude at the Suncor and Syncrude oilsands plants.
In situ bitumen production dropped as operators changed steaming cycles to reduce output during periods of extremely low prices. Heavy crude oil price differentials widened in 1991 to record spreads, dropping bitumen prices at times to levels below lifting costs. Condensate/pentanes plus production was up in line with higher gas production.
This resulted in production of 1.7 million b/d, about the same as the previous year. Total liquids production is expected to continue at that level this year. Natural gas production last year was 3.8 tcf, up 5% as a result of increased exports to the U.S.
It was a turbulent year as gas prices dropped again, and the bitter conflict between the California Public Utilities Commission and Canadian gas producers and governments escalated. The apparently short term and expedient approach by the regulators could cause damage to the smooth flow of gas to the California markets, Gas production this year will probably be up about 5% again as exports increase with the Iroquois line completion.
A FINANCIAL CRISIS
The malaise of North America's upstream oil and gas industry can be characterized in Canada as a financial crisis.
The Canadian upstream industry's $1 billion loss was the second such loss in 6 years. There is a fundamental rethinking of the industry's prospects under way. There have been sweeping changes to corporate structures, to corporate goals and cultures, and to investment behavior in the upstream sector.
A stronger industry with a different face is emerging, one able to cope with the new challenges and opportunities. No one expects higher oil and gas prices to solve the financial quandary.
The industry has oriented its investment spending towards early cash flow, which means less exploration and development, at least for the intermediate term. The lower activity levels this year are probably the point around which the upstream sector will oscillate for the next few years.
Part of the process of adapting to the new reality requires the provincial governments to reform their royalty regimes. Provincial treasuries, particularly that of Alberta, have suffered from drastic drops in their revenues as oil and gas prices dropped.
In spite of the loss in their direct resource revenues, the provinces must address their royalty take in view of the economic realities faced by an industry in a maturing geological environment, squeezed by declining revenues and escalating costs.
FUTURE OPPORTUNITIES
The Canadian upstream oil and gas industry will have a tough time again this year, but future opportunities are many. While the western Canadian basin is a mature oil exploration region, natural gas prospects are considerable.
The major wildcat discovery in the Monkman area of northeastern British Columbia, announced in April by BP Canada, tested gas at a rate of 85 MMcfd at 2,200 psi, one of the highest initial flow rates of any well in Canada.
Natural gas has been one of Canada's most important export commodities for decades.
Major new pipelines will provide the opportunity to increase these volumes in the years ahead and reduce the surplus overhang. Despite depressed prices and the regulatory difficulties currently surrounding exports, the future of natural gas augurs well for both the economy and the industry itself.
On the oil side, western Canada has by far the world's largest supplies of heavy oil and bitumen. These are high costs resources that also pose unresolved technological and environmental challenges.
That challenge notwithstanding, the size of these resources and the economic opportunities they represent call for innovative strategies for their development.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
