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The Great Canadian Gas Race

Northern gas rush proves timely for power generators.
Fortnightly Magazine - May 1 2002

radar screen of all CEOs across the world," he says. "Those are world-class wells. And whenever you have multiple hits at world-class levels, you attract a lot of attention. That's attracting a lot of the mergers and acquisitions."

As these major gas discoveries catch the eyes of profit-hungry producers, expenditures on exploration often take a hit during strong M&A activity in western Canada. "A lot of the acquisitions have occurred with companies that are in the active area of northeast B.C.," Gwozd says. "They get swallowed because they have high productivity per well. As a result, the huge growth in drilling activity in northeast B.C. has dampened somewhat."

In 1998, prior to the recent flurry of M&A activity, one third of the wells drilled in western Canada were exploration and the rest were development wells, where the pool of gas already has been found and there's virtual certainty gas will be hit each time. In 2001, only 25 percent of the wells drilled in western Canada were for exploration purposes while three-quarters were development wells.

"I think that there could have been more drilling in northeast B.C. in 1999 and 2000 if it wasn't for all the mergers and acquisitions," Gwozd says. "There's been strong growth in Alberta but some of the more prolific companies as they get merged or bought out in northeast B.C. had cut back on some of their drilling activity."

At the same time some of the mergers were nearing completion in 2001, gas prices began to tank, further dampening efforts to drive up production rates. "They don't have all the necessary funds to actually continue with their drilling programs," Gwozd explains. "We are anticipating a cutting back of some drilling, but we don't think that will have a major impact on gas production. That's because most wells that are drilled in one year are not actually tied in until the following year."

New Owner, New Attitude

This shift in the ownership structure of the Canadian industry means the new owners-both large U.S. and Canadian companies-will be seeking even greater returns on their investments and may not put as much cash back into exploration efforts. This trend could have a great impact on the overall level of activity in Alberta, DRI-WEFA's Osten contends.

"The people making the decision to drill wells in Canada will be the majors and the integrated independents that are U.S./Canadian companies that have big stakes in both the United States and Canada," Osten says. "They will be making the investment decisions as opposed to the mid-sized Canadian independents that are historically very aggressive. People will be looking for a better return on their investment. Instead of thinking they will eventually get more revenue for what they find, they'll want more assurance that they will be getting payback sooner."

In terms of the structure of the E&P sector, Osten is beginning to see a major difference between the United States and Canada. In the United States, there still remains a diverse group of players, including majors, independents and smaller companies. In Canada, though, because of