According to several recent reports, drilling activity is expected to take a slight dip in both Canada and the US. The Petroleum Services Association of Canada (PSAC), a trade association representing Canadian oil and gas service companies, has reported that drilling could fall by as much as 21% this year. Slowing demand and weak prices are considered to be the main drivers for the slowdown.

The association’s first quarter update, released at the end of January, forecasted a more severe slowdown than originally predicted in its initial release in November. The 2009 outlook estimates that Canada will see 13,500 wells for the year, which is down from 17,043 in 2008.

According to Roger Soucy, president of PSAC, the recession has begun to hit service companies, and deteriorating prices are lowering activity across the board. “Since the initial release of our forecast in November, the world’s rapid decline into recession has reduced demand for all commodities, including oil and gas.”

Drilling activity for 2009 is down 46% from Canada’s boom year in 2005 when there were 25,000 wells drilled. Despite the lower numbers, on a provincial basis it’s not all bad news. Things don’t look good for Alberta, where PSAC estimates 8,455 wells will be drilled in 2009 — a 27% drop from 2008. And Manitoba and Saskatchewan will see declines of 13% and 5%, respectively. But drilling activity is picking up in the far west, with British Columbia expected to experience a 7% increase to 905 wells.

“The pendulum has swung from a boom to a bust. With weather conditions most conducive to drilling in the early part of the year, the first quarter is always the tell-tale for the industry, and we’re just not seeing the level of activity that we would like,” Soucy said. PSAC based its 2009 Forecast on crude oil prices of US $50/bbl and natural gas prices of CDN $5.50/Mcf.

Meanwhile, south of the border, the US is also experiencing a downturn in drilling activity. Smith International suggests that, as of Jan. 30, 2009, rig count averaged 1,438 — down 360 rigs (20%) from December 2008. By Feb. 6, the land rig count had fallen to 1,366 rigs — another 5%. Overall, the land rig count has declined by one-third of its October peak of nearly 2,000 rigs.

Analysts at Simmons & Co. International concur. In a recent report, the company says the US land rig count has declined by approximately 47 rigs per week over the past several weeks. The report also corroborates the numbers reported by Smith, showing that the US Mid-continent has been hit hardest with a decrease of 295 rigs. The Rockies region has seen a drop of 139 rigs, which is 37% of the previous peak for the region, and the Gulf Coast is down 152 rigs — about 25% from the October peak.

The predictions are somewhat drastic because they are based on a very rapid decline in the past several months. Simmons & Co. expects the rig count to trough in Q2 at 900 rigs, which is down 1,300 rigs (55% to 60%) from the earlier peak. For the 2009 fiscal year average, the report estimates 1,155 rigs — down 42% from 2008.

The Simmons activity report points out that publicly traded mid-cap E&Ps represent 45% of the rig count, while private E&Ps make up 32% of the count. Mid-caps operate 653 rigs, a 31% decline from October. Private companies are currently operating 459 rigs, which is also a 31% decline of 209 rigs. The largest operators include Chesapeake Energy Corp. with 116 rigs, XTO Energy Inc. (75 rigs), Devon Energy Corp. (66 rigs), EOG Resources Inc. (59 rigs), and EnCana Corp. (41 rigs).

Devon plans to reduce its rig count to 32 rigs by the end of Q1 — a 50% decline from the October peak. EOG’s capital spending budget for 2009 calls for a 27% reduction in rigs from 59 in January to 45.

In 2009, North American companies will learn to do more with less. And while downturns in the oil and gas industry always improve over time, this recent slump could be slow going.

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