Talisman Energy Inc plan to slash its natural gas drilling in Alberta next year
Talisman Energy Inc. plans to slash its natural gas drilling in Alberta next year, the first in a series of expected cuts by oil and gas producers that reflect the eroding profitability of exploration in the province.
Low commodity prices and higher provincial royalties mean large companies like Talisman are moving more and more spending out of Alberta and into other jurisdictions, damaging the industry that's long been the driver of the province's wealth, and placing more jobs at risk.
Talisman, the third-largest gas producer in Canada, said yesterday that it will spend less in 2009 than the $5-billion to $5.3-billion budgeted for capital projects for the 2008 year.
Although it hasn't yet finalized its plans, it will definitely move cash away from exploring and drilling in Alberta toward so-called unconventional projects that provide better returns on capital.
These plans include extracting gas from shale rock formations in British Columbia and the United States.
"We will significantly reduce our [spending] levels on North American conventional drilling," Talisman chief executive officer John Manzoni said yesterday in a conference call. "At today's prices it's a marginal activity, and it's made more difficult with the recent royalty changes in Alberta... [We will do] only those projects with the highest returns."
Despite the attention paid to the oil sands, Alberta's economy has long been driven by natural gas. Gas production accounts for roughly 60 per cent of the government's royalties from energy, while 70 per cent of the wells drilled in the province are for gas.
But since a record 25,000 oil and gas wells were drilled in Western Canada in 2005, that motor has spluttered as lower commodity prices, higher costs and a stronger Canadian dollar made exploration less profitable. Only around 18,000 wells will be drilled in 2008, and that number is expected to slump to around 17,000 wells next year as Alberta's new higher royalty rates, which take effect on Jan. 1, further discourage spending.
Meanwhile, shale gas fields elsewhere in North America that weren't previously profitable have been opened up by breakthroughs in drilling techniques. As a result, major producers have pumped billions of dollars into acquiring stakes in shale fields in British Columbia and Texas while reducing their spending in Alberta, and analysts expect that trend to continue. "Talisman won't be in the minority in terms of scaling back their capital [in 2009]," said Jeff Fetterly, a Calgary-based analyst at CIBC World Markets. "Spending in Western Canada will fall by up to 15 per cent, and the greater margin of that will fall in Alberta."
While Calgary's energy firms won't announce their 2009 capital plans until later this year, the signs for Alberta are ominous. Last month, Murray Edwards, vice-president of Canadian Natural Resources Ltd., Canada's second-largest gas producer, said that Alberta has "the least attractive regime for conventional natural gas in North America right now."
Meanwhile, EnCana Corp, Canada and North America's largest gas producer, has scaled back its drilling in Alberta over 2008, instead spending around $1-billion on acquiring land in the promising Deep Bossier and Haynesville shale plays in the U.S.
"The producers advised the [Alberta] government what would happen if they increased the royalty rates, and now they're speaking with their feet," said Bill Gwozd, of gas services for Ziff Energy.