Hopes that Canada's natural gas industry might soon pull itself out of its severe slump were dashed Tuesday as the country's largest natural gas producers said low commodity prices will force them to keep domestic spending on exploration in 2008 on a par with this year's anemic levels.
At the Peters & Co. energy industry conference in Toronto, the country's two largest producers, EnCana Corp. and Canadian Natural Resources Ltd., both said they didn't expect their 2008 gas budgets to change significantly, while other major firms – including Talisman Energy and Husky Energy – have indicated they might even reduce their spending levels next year.
That's a worrying prospect for Canada's beleaguered energy service firms, given that low demand for their drilling rigs has sent the share price of sector leaders such as Precision Drilling Trust falling by almost half since last October.
Rig utilization rates in Canada are at their lowest this year since at least 2002, as producers eschew gas exploration in favour of alternatives such as share buybacks, or pursue growth in regions such as the oil sands.
“It's difficult to pull money away from oil right now,” said Canadian Natural vice-chairman John Langille. “[Natural gas exploration] costs are still too high in comparison to the sales price … I would anticipate 2008 spending at similar levels [to 2007].”
While Canadian Natural spent around $2-billion on gas exploration in 2006, it expects to spend roughly half that in 2007, a level that now looks likely to persist into next year.
Natural gas prices have plummeted from their hurricane-assisted highs in late 2005 because of weak demand and high storage levels in North America, while more recently Canadian prices have dropped over 20 per cent since the start of July. That's particularly problematic for firms involved with Canada's plethora of shallow or tight gas plays, which don't produce for a long time and so are uneconomic to drill at times of lower prices.
Last week, Jim Buckee, the outgoing chief executive officer of Talisman Energy Inc., Canada's third-largest gas producer, said the firm could cut its exploration spending in North America to $1.5-billion in 2008 from $2.2-billion in 2007. Robert Peabody, chief operating officer of Husky Energy Inc., said on the sidelines of the conference that his firm's spending was, “if anything, more likely to edge down as we move money toward other parts of our portfolio. We're trying to get more bang for our buck.”
Despite the slump, the larger firms aren't abandoning the Western Canada Sedimentary Basin altogether. Instead, many look set to pick off strategic assets from smaller players whose balance sheets aren't large enough to cope with the current price weakness, or from trusts struggling from the effects of the government's corporate tax decision last October. Several companies – including Canadian Natural, EnCana and Husky – said they would consider making acquisitions if the right opportunity came along, as they still have long-term faith in the North American gas market.
EnCana executive vice-president Mike Graham said the company wasn't on the lookout for corporate acquisitions, but was on the lookout for assets adjacent to its major operational areas from junior oil firms, which he said were “suffering” at present from the lower prices.
“Directionally, [the market for acquisitions] is probably getting more attractive as some players are reaching a position where they have to consider their options,” said Husky's Mr. Peabody. “But asset values are still quite healthy at the moment … it's not a fire sale yet.”
© The Globe and Mail
