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The Canadian Association of Oilwell Drilling Contractors expects a 6.7-per-cent drop in drilling activity in 2013 compared with 2012.Eric Gay/The Associated Press

The number of drilling rigs at work in North America's energy sector is falling – led by a steep drop in natural gas wells – and is headed for a further decline in 2013.

At the same time, the economics of hydraulic fracturing have slammed into reverse, with demand plummeting and capacity rising, pointing to growing cost pressures for oil field services firms, and to cost relief for producers.

The natural gas market has been under pressure from a long-lasting glut, with inventory levels in the United States hovering well above five-year averages. In previous cycles, prices would typically rebound as companies pulled back on production, leading to a draw down on inventories and, eventually, tighter supplies.

That dynamic no longer holds true. Energy companies have once again shifted away from natural gas production, but still face a supply problem perpetuated by their new strategy. Although gas prices are in the basement, oil prices remain relatively buoyant, with the number of rigs drilling for oil rising over the last year, in contrast to the marked decline in natural-gas rigs. Energy firms are also focusing on so-called liquids-rich natural gas plays, which produce more valuable products like condensate, butane, and propane.

However, production companies still take natural gas out of the ground when they extract these pricier commodities.

Falling demand for services means energy companies may dodge cost inflation in the oil patch. The aggregate price to complete a hydraulic-fracturing well in the U.S. will drop by 15 per cent in 2012 once all the year-end statistics are collected, Houston-based PacWest Consulting Partners predicts. And this tally comes as the global firm calls for a further drop in fracking demand.

"All key U.S. plays are now in a negative frack-pricing environment," Christopher Robart, a principal with PacWest, said in a statement earlier this month. The proportion of U.S. fracturing capacity in use hit 79 per cent in the third quarter of 2012 and is expected to average 74 per cent for the year, PacWest said. Rates will bottom out at 73 per cent in the first three months of 2013, the firm forecasts.

Demand for drilling rigs is also falling. The Canadian Association of Oilwell Drilling Contractors expects a 6.7-per-cent drop in drilling activity in 2013 compared with 2012. The organization leaned to the cautious side because of volatility in commodity prices, said Nancy Malone, vice-president of operations at CAODC.

Meanwhile, Baker Hughes Inc.'s North American rig count clocked in at 1,692 last week, compared to 1,948 in the same week of 2011. Gas drilling has been dropping significantly as prices remain in the gutter, offset as oil wells climb.

Encana Corp., one of North America's largest natural gas producers, has been shying away from its vast natural gas plays for months. But, at the same time, it does not necessarily expect its drilling activity to plummet.

"For us, our plans are going to continue to focus on drilling in our liquids-rich areas" such as the Duvernay shale play, Jay Averill, an Encana spokesman, said in an interview Friday. "We plan to double our pace of development there. But at the same time, it will be balanced out by many of our gas plays, where we won't be doing as much."

Encana will have the means to develop the Duvernay because it struck at $2.2-billion joint venture deal with PetroChina International Investments Co. earlier this month. Encana will release its budget in early 2013, giving investors a clearer idea of its drilling plans.

Baker Hughes, which provides services to energy companies around the world, is already sounding a warning to its investors. Earlier this month, it predicted weaker-than-expected revenue and profit margins for the fourth quarter because of slow onshore drilling activity in North America and "price erosion" in its pressure pumping operations.

It said its North American operating profit margin before tax should ring in between 8.5 per cent and 9.5 per cent in the quarter, compared to 11.7 per cent in the third quarter.

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