Talisman slashes Alberta drilling plans

Talisman slashes Alberta drilling plans
NORVAL SCOTT

00:00 EST Wednesday, November 05, 2008

CALGARY -- 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. TALISMAN ENERGY (TLM)

Close: $12.64, up 98 cents

Talisman: Lower Capex, Gas Drilling To Squeeze 2009 Output

Talisman: Lower Capex, Gas Drilling To Squeeze 2009 Output
14:36 EST Tuesday, November 04, 2008

OTTAWA -(Dow Jones)- Talisman Energy Inc. (TLM) expects to cut spending next year from 2008's reduced levels on the weakness in financial and commodity markets, squeezing production forecasts, Chief Executive John Manzoni said Tuesday.

The Calgary-based company is now likely to spend C$5 billion to C$5.3 billion in 2008, down from the previous estimate of C$5.5 billion, Manzoni said on a call to discuss third-quarter earnings.

It also expects 2009 capital spending plans to be lower still, the latest among Canadian oil and gas companies to announce or hint at budget cuts next year as the credit crunch stymies their ability to tap debt markets.

"We will prioritize spending in 2009 depending on returns," Chief Financial Officer Scott Thomson said. He added that the lack of major financial commitments next year affords the company some flexibility with its budget.

Talisman's conventional natural gas operations in North America will feel the brunt of these cuts, which Manzoni described as a "marginal activity," particularly in Alberta. The resource-rich province is bringing in higher oil and gas royalty rates from Jan. 1, rendering large swathes of gas drilling uneconomic at current gas prices, according to industry participants.

The company will instead focus on unconventional plays such as the Montney tight gas resource in Alberta or the Marcellus shale in Pennsylvania, Manzoni said. These are promising but early stage reserves and shifting cash away from producing conventional resources will have an impact on output next year, he added.

-By Hyun Young Lee, Dow Jones Newswires; 613-237-0669; hyunyoung.lee@ dowjones.com