By Dina O'Meara, Calgary Herald, March 3, 2010
Utilization recovers after painful 2009
CALGARY - Dire predictions of low drilling activity in Western Canada to start the year have faded, with rig utilization averaging a strong 60 per cent for January and February, according to an industry association.
Last fall, the Canadian Association of Oilwell Drilling Contractors had forecast a rather bleak 40 per cent utilization rate for the first quarter, traditionally the busiest time of the year for drilling.
But a surge in crude prices last year pushed up activity in the oilpatch and spilled into 2010. The number of active rigs peaked at the beginning of February at 520 out of 802 rigs, or 64.5 per cent, compared with a year prior, when rates were around 47 per cent.
"This is starting to look a lot more like a typical year," said association president Don Herring. "We can expect to go into breakup any time now, but it won't be a premature break up like last year that came solely as a result of financial issues."
Poor prices and soft demand due to the recession pulled down drilling to decade-low levels in 2009. In addition to the continental and global factors pressuring activity in Alberta, new royalty rates were instituted that hit producers in already hurting pockets.
The rig rate already is falling with less frigid weather and as road bans on heavy equipment start going up, said Duane Mather, president of Nabors Canada.
Activity typically drops off to between 10 per cent and 15 per cent during the second quarter, except during boom times such as the 2005 to 2007 stretch, Mather noted.
And all bets are off on what's going to happen during the second half of the year as producers in Alberta await news on royalty fees and the economy recovers.
Mather said a wealth of rigs and dearth of people continue to plague the drilling sector, almost as much low natural gas prices and uncertainty over royalty levies in Alberta.
"Until we get Alberta back to some sort of sustained activity, until we get a market back that's more gas driven and/or something comes out of the competitiveness review that makes shale gas and shale oil competitive in Alberta, I just don't know where the number of wells will come to justify additional equipment," he said.
Many capital budgets hinge on the results of Premier Ed Stelmach's long-awaited competitive review, already months behind schedule, analysts said.
"Everybody is waiting on the government to see what the new royalty program is," said analyst Kevin Lo, with FirstEnergy Capital Corp. "Until you find that out, as a producer, why would you commit to a program for the back half of the year? And as of right now, nobody has any visibility and there's a lot of uncertainty."
Once producers have a handle on the changes, if any, they will be able to redraft their capital programs for the rest of the year, he said.
The investment brokerage predicts a 38 per cent utilization rate for 2010, with drilling activity creeping out of a 16 per cent spring trough rate to 37 per cent utilization during the third quarter and 47 per cent in the fourth quarter.
Prior to the latest downturn, rig rates during the last quarter of the year fluctuated between 48 per cent and 60 per cent.
Climbing demand for natural gas and oil started lifting activity in the winter of 2005, when the portion of working rigs soared to 71 per cent.
By the end of February 2006, the number had climbed to 95 per cent.
However, within a year, the end of the boom was nigh and rig utilization for the fourth quarter had fallen to 37 per cent. Two years later in the fourth quarter of 2009, the rig rate bottomed out at 30 per cent.
There could be a significant negative response from investors if the Alberta government fails to adjust the royalty levy, Herring said.
"We've certainly seen a strength in investment in Alberta, some of that because the market thinks recommendations in the report will be favourable," he said.
"It will become very important as we go through the balance of the year. If they don't meet investor expectations, there could be a significant negative response."
domeara@theherald.canwest.com
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RIG Utilization Peaks For Western Canada
Year Wells In Operation Capacity
2004 645 out of 693 93 per cent
2005 693 out of 730 95 per cent
2006 743 out of 785 94.5 per cent
2007 654 out of 845 77 per cent
2008 593 out of 882 67 per cent
2009 421 out of 857 49 per cent
2010 520 out of 802 65 per cent
Source: Canadian Association of Oilwell Drilling Contractors
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