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The conventional oil and gas industry in Western Canada found some solid footing in 2017, between increased drilling activity and rising land sales.
The number of new wells drilled across Canada jumped 86 percent from the previous year, between January and October. A total of 6,569 wells were rig released in 2017, including test wells, up from 3,519 wells drilled in the corresponding period last year, with all provinces reporting increases in activity.
The uptick in drilling has created a backlog for services downstream from the drilling rig, particularly in the well completions sector where longer laterals and greater fracture stimulation density and intensity are driving demand.
Land sales, usually seen as a leading indicator for future activity, are also cranking up across the Western Canadian Sedimentary Basin. The emerging East Duvernay shale basin is driving land sales in Alberta, with the Montney continuing to generate interest in both Alberta and B.C.
However, the key to keeping the 2017 momentum going into 2018 will remain higher prices. All eyes are on OPEC and the U.S. shale plays when it comes to oil markets. Gas prices remain a wildcard.
Activity Trends
The following dashboard provides information on some of the leading indicators of future oil and gas activity, including capital spending, drilling forecasts, trends for licensing and rig releases, as well as rig activity rates.
Drilling Forecasts for 2018
The Canadian oil and gas industry is forecast to drill 7,550 wells by year-end 2017, an increase of around 90 percent over 2016, according to Petroleum Services Association of Canada’s (PSAC) 2018 Canadian Drilling Forecast released in Calgary on Oct. 31. PSAC is predicting a further four to five percent increase in well counts in 2018, for a total of 7,900 wells rig released (including test wells).
The 2018 forecast is based on crude oil prices of US$53 per barrel, average natural gas prices of C$2.50 per thousand cubic feet and a Canadian dollar averaging 82 cents U.S.
The Canadian Association of Oilwell Drilling Contractors (CAODC) is projecting 2018 wells drilled will total 6,138, an increase of 107 from 2017 (6,031). (CAODC excludes oil sands evaluation and test wells in its forecast.)
One of the Canadian oil and gas industry’s biggest hurdles continues to be lack of market access and regulatory stability, says the CAODC. Two major energy infrastructure projects — the Pacific NorthWest liquified natural gas plant and the Energy East crude oil pipeline — have been cancelled in the past six months and the federally-approved Trans Mountain pipeline to the West Coast could be delayed, it says.
“The cancellations of key energy infrastructure projects and further delays to those already approved, send a message to potential investors that Canada’s rules and regulations around these projects are subject to continuous change at a moment’s notice,” said Mark Scholz, the CAODC president.
While there are signs the drilling and service rig market has bottomed out, meaningful upward movement of day rates remains a struggle, says the CAODC. In 2018, the CAODC is hopeful that some stability — albeit, a “muted stability” — may return for member companies.
“What we need most is the optimism a strong investment climate will create,” said Scholz. “Market access and a predictable regulatory environment are the most significant factors in creating an environment that will allow our industry to deliver stronger results in the coming years.”
Capital Spending on the Rise
The 65 oil and gas producers tracked by the Daily Oil Bulletin originally forecast $28.54 billion of capital expenditures during 2017. During the year, however, there has been a slight overall increase in planned expenditures of about 7.5 percent. By mid-
November, the same group of producers anticipated spending $30.73 billion this year, or an increase of $2.19 billion from original estimates.
Some producers who updated capital plans during the third quarter reporting season have added to 2017 capex by shifting planned spending from the first quarter of 2018 to the fourth quarter of 2017.
Producers including Kelt Exploration Ltd., Tamarack Valley Energy Ltd. and Bonterra Energy Corp. all announced plans to accelerate capital to this year to take advantage of more favourable service costs or availability issues.
Like last year, though, only a handful of producers have announced spending plans for 2018. Most producers will finalize their plans in December, or early in the New Year.
Juan Jarrah, an analyst at TD Securities Inc., said at the PSAC drilling forecast event stability in oil prices going into 2018 should translate into a 12 percent increase in exploration and development capital spending by oil-weighted producers in 2018, following a 17 percent increase in 2017.
But after enjoying a predicted 68 percent increase in spending in 2017, natural gas weighted producers are expected to only increase spending by around four percent in 2018 as price volatility makes budgeting difficult.
“Gas spending will be flat year-over-year in 2018,” said Jarrah, with the size of producers a key determinant in who will be spending. He expects spending by larger producers with production over 90,000 barrel of oil equivalent to increase by 15 to 16 percent in 2018. “Smaller producers will be looking to stay flat in terms of spending.”
But all this could change in a heartbeat if natural gas prices decline, he added. “For gas producers it’s difficult to pick a price to base spending on. We expect to see volatility in gas exploration and development spending in 2018 and in the remainder of 2017.”
Steady Increase in Licence and Rig Release Counts
Well licences reached a three-year high of 7,757 wells across Canada during the first 10 months of 2017. The total number of wells compared to 4,437 during the same period in 2016.
Each month of 2017 has seen an increase in the licence and rig release counts compared to the year-prior periods, mirroring strengthening commodity pricing during most of 2017 compared to 2016.
Over the first three-quarters of the year, the PSAC regions showing the biggest year-over-year increases in licence and rig release counts include Southwestern Saskatchewan, East Central Alberta and Foothills Front.
On a percentage basis, the biggest year-over-year gains in licensing have occurred in B.C. and Manitoba.
To the end of October, B.C. approved 718 new wells compared to 237 in the January-to-October period last year (up 202 percent), while Manitoba has licensed 190 new wells compared to 76 a year ago (up 150 percent).
Saskatchewan licensed 2,899 wells in the first 10 months of the year versus 1,685 a year ago (up about 72 percent). In Alberta, 3,938 wells were licensed to the end of October, up about 62 percent from 2,431 wells a year ago.
Meanwhile, on the drilling front, the total of 6,569 wells drilled across Canada in the first 10 months of the year — also a three-year high — represents an 87 percent year-over-year increase.
On a percentage basis, Manitoba recorded the largest year-over-year gain in rig release counts. Producers have drilled 202 wells in the province to the end of October compared to 63 a year ago (up 220 percent).
Alberta producers drilled 3,613 wells in the first 10 months of 2017, up from 1,976 a year ago (an increase of 83 percent), while operators in Saskatchewan rig released 2,230 wells compared to 1,196 in January-October 2016 (up 86 percent).
Operators in B.C. drilled 512 wells to the end of October, up 90 percent from 270 a year ago.
Rigs Engaged
PSAC says that lower service pricing and improved productivity, not higher prices, drove the resurgence in drilling activity in 2017.
For 2017 to-date, the absolute number of active rigs in Western Canada exceeded the count for the prior-year period.
As of mid-November, 35 percent of the fleet was active, at about 220 rigs working across the Western Canadian Sedimentary Basin. That compares to about 180 rigs, or 26 percent, in the comparable period in 2016.
Looking at Plays
PSAC is forecasting steady activity across the four western Canadian provinces in 2018, with the Alberta well count increasing by 152 wells to 3,998, the Saskatchewan well count climbing by 84 to 2,931 wells, and the B.C. count up from 612 wells in
2017 to 730 wells in 2018. Manitoba is expected to remain steady at 230 wells.
Uncertainty in gas prices, combined with transportation challenges, are the main risks facing gas producers in the Montney play straddling the Alberta and B.C. border, said TD’s Jarrah. Recent maintenance issues on the TransCanada Corporation pipeline system also created market access issues driving down prices. Because of these challenges, he expects investment in the dry gas areas of the Montney to slow in 2018.
“The Spirit River play (Deep Basin) is also a very dry play and we expect slightly reduced activity there in 2018 as well,” he added.
On the oil side, Jarrah said the low-cost Viking will continue to attract investment and with improved productivity in the Cardium play, it should also see an uptick in 2018. “All the oil plays except for the mature Bakken should see improved activity,” he said, adding the emerging East Duvernay play would be a wildcard that could see increasing investment as 2018 unfolds.
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