Editor’s note: This is an excerpt from the 2024 Top Operators Report, brought to you by KPMG in Canada & geoLOGIC systems ltd. Download a free copy of the full report here.

Canada’s oil and gas producers continued adding reserves and production in 2023, whether through mergers and acquisitions or organically, in the build up to new egress opening out of the basin.

However, overall proved reserve and production increases among Canada’s top 70 public companies didn’t keep pace with increases in capital spending.

Proved reserves, excluding new entries to the 2024 Top Operators report that didn’t report reserves in 2022, increased 5.5% in 2023 on a boe basis. Production increased 4.3%.

Capital expenditures were up 18% among public operators, excluding acquisitions and divestitures, and 25% including acquisitions and divestitures.

“As we have heard, inflation is real. The cost of all services and materials continues to increase, which will create a disconnect between reserve additions and capital costs. It simply costs more to get those reserve additions,” said Zach Little, Partner, M&A Tax, KPMG in Canada.

“Other factors also include increased spending on non-reserve capital including land acquisitions, ESG related items and facilities. Facilities and infrastructure, especially to address associated natural gas, requires considerable investments that do not directly add to reserves.”

“In addition, as service providers work to reduce emissions, increase electrification, improve fuel use and further improve drilling and completion times and accuracy, the cost of these critical investments need to be funded through producer capital programs.”

Gas operators add reserves after activity increase in 2023

With natural gas drilling up 10% in 2023 compared to the previous year, plus a few major acquisitions, it comes as no surprise both top operator reserves and production increased as well.

Proved gas reserves were up 13.5% in 2023 over the previous year, reaching over 60 trillion cubic feet. Gas production was up around 550 mmcf/d.

“Reserves additions outpaced production, with the average reserve life index jumping to 14.1 years after sinking as low as 9.8 years in 2019,” said Mark Young, Senior Analyst, Evaluate Energy.

“Consolidation drove most of these additions, but there was also some significant organic growth in mid-sized operators as they delineated their undeveloped land base, stepped out from developed areas, or leveraged technology to improve access to resources.”

On the M&A front, there were three major gas weighted deals in 2023 including two in the Deep Basin and one in the Montney, said Young.

“They were bolt-on acquisitions, only on a larger scale. The two Deep Basin deals fit like a glove with existing Deep Basin operations and the companies both have expertise in developing the stacked resources,” said Young

Unlike in the past when deals were driven by broader industry trends, “recent transactions have been focused on individual business needs,” said Aaron Collier, Partner, Strategy and Deal Execution KPMG in Canada. “There were deals south of border that seemed to be driven by inventory needs, however, this seemed to be less of a driver on recent transactions in Canada.”

“Bolt-on acquisitions are very fact and circumstance driven adding production in an offsetting location, improving efficiency by developing a larger land base, opportunistic M&A where the seller is motivated.”

Oil and liquids production and reserves grow more slowly

Operators reported proved oil and liquids reserves increased by 8.6% (2.55 billion bbls) in 2023 over the previous year. The addition of Strathcona Resources and Greenfire Resources to the top 70 public companies covered in the Top Operators report and Suncor Energy’s acquisition of the remaining share of the Fort Hills oilsands mine accounted for slightly over 80% of the increase in proved reserves. Subtract them from the cohort and proved reserves increased only 4%.

“Oil and liquids production averaged slightly under four million bbls/d in 2023, up almost 8% from the previous year,” said Young. “Excluding the addition of Strathcona and Greenfire, production only grew by 4.2%. Increased liquids production from gas weighted operators also contributed to growth.”

Condensate and pentanes plus production was up over 40,000 bbls/d in Alberta alone in 2023 compared with the previous year as operators continued taking advantage of higher prices to target liquids-rich plays.

“LNG and increased export will likely not alter the strategy for liquids-rich gas players or those with large amounts of associated gas. If LNG can support an increase in price, it would significantly improve the netbacks for these entities and fuel increased capital and returns of capital,” said Little.

“With increased LNG export capacity, the industry will have potential to clear more natural gas — whether it is associated gas, gas post liquids extraction, or dry gas wells — from the basin, which should drive a more attractive price than we currently see in the market.”

Longer term, increased export could support focused gas development, he added. “That will be driven by whether LNG will in fact drive a more attractive and sustainable price.”

To learn more about Canadian oil and gas production and reserve trends download your free copy of the 2024 Top Operators Report here.