BUSINESS

Optimism amid the oil gloom

Natural gas is fuelling the petroleum industry

JENNIFER HUNTER August 17 1998
BUSINESS

Optimism amid the oil gloom

Natural gas is fuelling the petroleum industry

JENNIFER HUNTER August 17 1998

Optimism amid the oil gloom

BUSINESS

Natural gas is fuelling the petroleum industry

Looking down from his 24th floor office in downtown Calgary, Jim Buckee, president of Talisman Energy Inc., can see a sweeping panorama: building cranes erecting office towers, the sun outlining the peaks of the Rocky Mountains and the foothills of Alberta, where his company has just made a major natural gas discovery. It is a scene of optimism, despite the perilous fall of oil prices, to $13.83 (U.S.) at week’s end from an average of $20.60 per barrel last year for benchmark West Texas intermediate crude. Buckee, too, feels the optimism. Last year, Talisman shifted its emphasis from oil to gas, and with the price of gas going up, the move seems prescient. “It’s not that we foresaw the softening of oil prices,” Buckee says. “We believed

there would be increased demand for gas.” And he was right. The average fieldgate price for gas was $1.87 per thousand cubic feet in 1997, but future prices this year have edged up over $3.95 and are expected to increase as two gas pipeline expansions—the TransCanada pipeline and the Northern Border pipeline—come on stream in November and allow more Canadian gas to be channelled into the United States. Companies such as Talisman, or smaller Calgary-based Berkley Petroleum Corp., have both oil and gas assets, and are able to buffer the hit of lower oil prices. ‘We’re still making a decent return on oil prices,” says Mike Rose, president of Berkley. “But it’s really gas prices that make the difference.” The plunging Canadian dollar has also helped to compensate for

falling oil prices since Talisman and other companies receive U.S. dollars for their product, but pay salaries and purchase supplies in Canadian kinds. Robert Mansell, head of the economics department at the University of Calgary, says that over the past few months, the dollar has offset the slide in oil prices by almost 10 per cent. “It improves the situation in the short term,” he explains. And the new optimism about gas will neutralize the impact of falling oil prices on provincial revenues, says Shannon Taylor of Alberta’s treasury department. Every 10-cent shift upward in gas prices means an extra $209 million in provincial revenues. So while oil revenue projections have been lowered to $644 million from $909 million, the “shift in gas prices will offset falling oil royalties,” Taylor says. Notes Rick Roberge, an energy analyst with PricewaterhouseCoopers in Calgary: “Gas is the silver lining in what has become a downturn in the industry.”

But along with every silver lining comes the proverbial black cloud. The low Canadian dollar means U.S. firms can snap up Calgary-based oil companies for a song. Northstar Energy, Chauvco Resources, Archer Resources, Norcen Energy Resources, Tarragon Oil and Gas have all been taken over by U.S. companies in the past year. “It increases the vulnerability of Canadian companies,” Buckee says. Adds Roberge: “The big American companies continue to hover. They can get assets on the cheap and tell Wall Street they are expanding internationally.” And uncertainty over oil prices could continue until the end of the year, depressing the value of oil company shares even more and affecting exploration and development plans. (The Toronto Stock Exchange’s oil and gas index fell 1,354.97 points between April and August.) The glut of oil on the market will continue until Asian economic ills improve, and the Organization of Petroleum Exporting Countries makes further cuts to production. Then, too, there are new worries about the American economy. “Alberta is well-positioned to deal with the Asian flu,” says Mansell. “But what really worries me are signs of a slowdown in the United States.” There are already far fewer oil rigs at work: by the end of July there were only 252 employed out of 573 available. “No one in the industry is pushing a panic button,” said a spokesman for the Canadian Association of Oilwell Drilling Contractors. “But if this continues through the end of the year, more people will be concerned.” Executives such as Berkley’s Rose say they have seen ups and downs before. “You have to be optimistic in this business,” he says. Jim Buckee of Talisman is also sanguine: “The underlying fundamentals are good.” That sort of confidence is the kind of fuel the Alberta economy continues to rely on.

JENNIFER HUNTER