Number of active drilling rigs sets Canadian record

The number of rigs drilling oil and gas wells in Western Canada has surged to a record high, driven by strong prices, especially for natural gas, the industry's umbrella group said yesterday.

In its weekly tally of rigs operating in Canada's main producing region, the Canadian Association of Oilwell Drilling Contractors reported the industry was operating nearly full out, with an unprecedented 597 rigs drilling, or 96 per cent of the fleet of 624. That compares with 541 rigs, or 87 per cent of the fleet, last week, and 536, or 91 per cent, a year ago.

The previous record was set last February when 568 rigs were drilling in Alberta, British Columbia, Saskatchewan, Manitoba and the Northwest Territories, CAODC president Don Herring said. A key driver for the activity is expectations among producers for unprecedented levels of cash flow in 2001, due largely to natural gas prices that have surged throughout North America amid fears of tight supplies this winter.

February natural gas on the New York Mercantile Exchange closed up 13 cents at $9.819 per million British thermal units yesterday, just shy of the record high of $9.98 set on December 27. In Canada, spot gas in Alberta sold for C$12.90 a gigajoule, up 15 Canadian cents on the day. A year ago, NYMEX gas was worth $2.216 per million BTU and Alberta gas traded for C$3.05 a gigajoule.

"About 54 per cent of the wells being drilled now are gas," Herring said. "But if you pulled the dry wells out of the count and the service wells, then about 61 per cent of the completions are gas." The association has forecast the number of wells to be drilled in Western Canada this year will hit 18,500, also a record. Several large oil companies have announced they would pile on the money earmarked for exploration and production to record highs this year, with much of the cash targeting high-priced gas.

Petro-Canada said it would pump C$1.4 billion into operations, Alberta Energy Co Ltd set a budget of C$2.2 billion and PanCanadian Petroleum Ltd said it would spend C$1.5 billion. One big worry among the drilling companies, however, has been a severe shortage of workers to man the equipment and weather the boom. In November, the industry made a cross-country appeal for 3,000 workers, promising quick training and good wages.

"We're running virtually flat out. Now, I'm not sure it's completely solved because it is an industry with fairly high turnover, so we'll continue to run the training facility at Nisku (near Edmonton) at capacity," Herring said.

"But we've got enough people, at least in the short term, to field this many rigs." The sprinting pace of the drilling industry has led to a healthy jump in the stocks of oil service companies. The Toronto Stock Exchange's oil and gas service subindex rose 42.86 points yesterday to 3315.35, up 23 per cent since the beginning of December.

Shares in the biggest player, Precision Drilling Corp, rose C$1.05 to C$55.50, while the No 2 player, Ensign Resource Service Group Inc, jumped C$1.80 to C$52.75. Meanwhile, Canadian energy firms should post fourth-quarter profits as much as five times higher than last year because of soaring oil and natural gas prices, analysts say.

The big winners will be natural gas producers. The average price of the commodity in the quarter climbed to C$8.55 per unit from C$3.09 in the fourth quarter of 1999 due to low supply and rising demand from gas-fired generators.

For most heavy oil producers, however, net earnings will only double from last year because they buy high-cost gas to make steam to pump the tar-like crude. The fourth-quarter reporting season will kick off January 18 when integrated firms Imperial Oil Ltd and Suncor Energy Inc announce earnings.

Producers of conventional light oil will benefit from a rise in prices to an average of $31.89 a barrel in the three months ended December 31, 2000, from $24.57 in the year-earlier quarter. The hunt for more supplies in deeper basins and in frontiers such as the Arctic means virtually all firms will report higher finding and development costs,
analysts said.

"Profits at most firms will be way up because of higher gas and light oil prices, but firms that use steam in the production of heavy oil won't see the same gains because of the high cost of gas to make the steam," said Wilf Gobert, an analyst with Calgary brokerage Peters & Co.

"That's going to impact Imperial Oil because half of their daily crude output comes from operations in Cold Lake, Alberta, where all of that is produced using steam." He expects Imperial to post fourth-quarter profits of about C$1.08 a share, up from 90 Canadian cents in the third quarter and 51 cents in the fourth quarter of 1999. However, Imperial, along with other firms that make gasoline, will benefit from refining margins that improved to about C$11 a barrel from C$8.50 in the year-before quarter because of higher oil prices.

"Our expectation is that the fourth-quarter results for gas firms will show an improvement over the third quarter, which were very strong," said Randy Ollenberger of Merrill Lynch. He said that included companies such as Alberta Energy Co Ltd, Anderson Exploration Ltd and Canadian Hunter Exploration Ltd.

Analysts surveyed by First Call/Thomson expect Alberta Energy to report fourth-quarter profits of C$2.15 a share, up from 45 Canadian cents a year ago and above the record high of C$1.63 set in the third quarter of 2000. "We see great earnings momentum in the fourth quarter carrying over into the first quarter of 2001 and that's going to be one of the things that causes
investors to pay attention to the group," said Ollenberger.

Analyst Peter Linder of Research Capital Corp. said average finding and development costs will probably climb to about C$10 per barrel of oil equivalent from C$8 in the year-earlier period. "The profits will be fantastic and the higher natural gas prices will more than
offset the higher finding costs."