Canada in Gas Drilling Slump; U.S. (and Colorado) Far Behind?

Photo Sharing and Video Hosting at PhotobucketIf you traveled about 1,000 miles north across the Canadian border in the Province of Alberta, you would almost think you landed in Western Colorado. Gas rigs dot the landscape. Calgary is not unlike Denver, accommodating many of the main energy company headquarters. Housing and labor shortages, drilling impacts, air and water quality protection, etc, etc-plague Alberta’s communities. Hold up a mirror to Colorado and you see Alberta.

So when a headline in the Canadian Financial Post newspaper read: “Oilpatch drillers expect layoffs in 2007” back in November of 2006, maybe someone in this state should have taken notice. The culprits in the natural gas drilling slowdown Up North are low natural gas prices; less U.S. consumer demand; increased supply and storage; no Gulf hurricanes in 2006; and a mild winter. But wait! Couldn’t that apply to the U.S. gas industry, too?From the Financial Post:

CALGARY – After years of labour shortages and frantic activity levels, oil and gas drilling contractors anticipate layoffs next year as low natural-gas prices discourage the search for new supplies in Western Canada.

Don Herring, president of the Canadian Association of Oilwell Drilling Contractors, said his members are not likely to need as many rig hands next summer. An estimated 55% of Western Canada’s fleet is expected to sit idle if projections prove accurate.

Talk of job cuts in the bellwether sector is among signs emerging that Alberta’s supercharged economy is beginning to pause, in part due to the collapse in the price of heating fuel.

Residential real-estate prices are stalling, labour availability in the oilsands sector appears to be increasing and scores of gas-focused junior companies caught with too much debt are putting themselves on the block.

Oil companies are in the process of drafting budgets for 2007. The big concern is that a warm winter will keep gas inventories overstocked, continuing the year-old price slump well into next year.

With 427 rigs expected to be active in 2007, out of a fleet of 825, Mr. Herring estimated nearly 2,000 rig hands could be out of work at some point next year. Layoffs are expected to be concentrated in the summer, when the group is predicting only 376 rigs will be active, down from 664 in the first quarter.

Canada provides 86% of gross receipts of U.S. foreign natural gas supplies. Hurricane Ivan in 2004 and Hurricanes Rita and Katrina disrupted U.S. natural gas production for several years, increasing the demand. By 2006, many of the Gulf sites were back on line with the addition of natural gas produced in the West.

Natural gas futures have fluctuated wildly in the past year, too, from a low of almost $4/MMBTU to nearly $9/MMBTU. Many gas projects in Western Canada are uneconomic at prices below US $6. For U.S. energy companies, that translates to around $4.

Counting the number of rigs and looking at gas production figures will not help predict the future of the oil and gas industry in Colorado. Checking government natural gas reports and the Henry Hub (the pricing point for natural gas futures,) and the Weather Channel may be more wise.