O&G Inquirer: Weak Or Worse: Field Activity Will Likely Decline, Perhaps Steeply

Selected quotes:

"Herring strongly doubts that the oil and gas sector now faces a long 1980s-style spell of poor commodity prices. The repeated downturns of the 1980s and early '90s, in his view, were caused by economic weakness (and thus weak energy demand) coupled to ample energy supplies, especially for natural gas. "Even if the world economy does not expand as rapidly as it has in the recent past, global energy supplies are now much closer to the razor's edge. More oil and gas activity has to occur or there won't be enough supply to meet the demand," the CAODC president comments."

"Furthermore, it's getting harder to tap new oil and gas supplies, which means more work for service companies. "In 2007, the average well took 7.4 days to drill, compared to nine days in 2008. That's a material difference," Herring says. For 2009, the CAODC anticipates that the trend toward more drilling days per well will continue, driven by unconventional gas plays in British Columbia, the Bakken tight oil play in Saskatchewan, and deeper natural gas wells generally."

"According to the Calgary-based consulting firm, a producer requires $9 per Mcf to earn a 15 per cent return on a full cycle basis from newly drilled natural gas wells. (Ziff's figures include $2 per Mcf for drilling; $1.50 for processing, pipe, and other wellhead facilities, $1.25 for operating costs, administrative overhead of $0.50 or so, and $1.75 in Crown royalties.) The Alberta spot gas price this fall was less than $7 per Mcf and now it is below $6. "At that price, a producer suffers a technical loss if its costs are average," Gwozd says."

"The first step in oil and gas development is seismic surveying, and the geophysical sector's health is traditionally seen as a signal of what could be coming for other services in conventional oil and gas. "For our members, 2008 was the worst year in a decade. It was almost unbelievably bad," says Mike Doyle, president of the Canadian Association of Geophysical Contractors [CAGC]. "The first quarter was decent. Then we got hammered by the Alberta government royalty review, the high Canadian dollar [versus the U.S. dollar], and finally the global financial crisis.""

The outlook for North American natural gas producers(and drillers) looks very bleak: domestic and foreign supply is up, consumption is down(at least temporarily), production costs are increasing and these increases are mostly irreversible as they are due to geology. Ironically it looks like only politicians could improve the situation.