Striving to stay afloat
 Click here to go directly to this story within the full PDF version of this issue, with any maps, photos or other artwork that appears in some of the articles.
Email it to an associate.
Canada’s service sector turns to innovation to cut costs, ride out current storm; Beaver Drilling creates rig to optimize drilling
GARY PARK For Petroleum News
Total revenue generated by Canada’s petroleum industry is forecast at C$74 billion this year, compared with C$149 billion in 2014, according to ARC Financial Corp.
And that’s about all anyone needs to know as they watch the tidal wave from thousands of layoffs and billions of dollars in spending cutbacks spill from explorers and producers to service companies and now countless other associated businesses such as hotels, restaurants and vehicle dealers.
Drilling operators in Western Canada saw active rig counts plunge from the peak winter season, which has averaged 500 to 600 over the past five years to below 200, approaching the year’s traditional low point in the April-June period and is reportedly now sliding to a historic low of about 50.
In Saskatchewan, a drilling pacesetter in recent years, not a single rig was drilling new oil or natural gas wells entering April.
That presents a race against time for contractors as Canada’s largest banks brace themselves to cover potential energy-related losses.
Credit losses seen The Royal Bank of Canada has raised its provision for credit losses to C$410 million in its first fiscal quarter, up 50 percent from a year ago, largely the result of four unnamed energy companies and one utility.
“There’s no question that the persistently low oil prices are tough for clients in the affected regions and are driving an increase in credit provisions in our portfolio,” RBC Chief Executive Officer Dave McKay told analysts.
He said the RBC still believes the pressure from oil prices “will be largely contained to oil-exposed regions and that the strength in other regions will support modest GDP growth this year. In fact, we have started to see the economic benefits of low oil prices and a weaker Canadian dollar on manufacturing and export activity.”
The RBC estimates that if oil averaged US$30 in 2016 its provision for credit losses would be 0.3 percent to 0.35 percent, while oil prices of US$25, which would drag Canada into a recession, would see the money set aside for losses rise as high as 0.5 percent.
Rigs decommissioned Precision Drilling and Ensign Energy Services, two of the largest drilling contractors, have decommissioned dozens of older, less-efficient rigs; some of their peer companies are staring into a chasm, although few have sought outright bankruptcy protection.
There are plenty of examples of lenders cutting some slack to companies that are making every effort to sell oilfield equipment, while embarking on a drastic overhaul of their cost structures.
Beaver Drilling’s response Rather than bemoaning its fate, one privately owned drilling contractor is eagerly taking up the challenge by embracing innovation.
Beaver Drilling is combining cost-cutting with new-generation technology as it concentrates on natural gas plays in northwestern Alberta and northeastern British Columbia, where prolific resources and upgraded technology can keep drilling operators within a break-even range.
Not that Beaver and its peers are able to avoid taking a dose of unpleasant medicine.
The company has reduced its rig fleet to five from nine, in response to Saudi Arabia’s refusal to cut production and reduce the global crude supply glut, and sees little hope of re-commissioning those units.
Beaver President Kevin Krausert, who paid Christmas bonuses last year to keep his crews intact, said the company’s earnings slumped 50 percent in 2015 and are expected to slide another 25 percent this year.
But Beaver’s longstanding strategy of planning around market upheavals has kept the company’s head above water.
New rig ‘optimizes’ variables Krausert has also become a trailblazer by working with his staff to create a new rig that “optimizes” drilling variables, while increasing output.
The rig also uses hydraulic power to move from well site to well site, instead of being dismantled, moved by truck and reassembled. In addition its greenhouse gas emissions are much lower than many rigs.
Krausert is full of hope that gains in innovation are preferable to simply waiting for a turnaround in commodity prices.
The story of his company’s efforts to get ahead of what he calls the industry “pity party” underpins a new “Oil Respect” campaign by the Canadian Association of Oilwell Drilling Contractors, which has decided to spread the message of successes achieved by small oilfield service companies and unemployed workers.
The association’s objective is to retaliate against critics by demonstrating how drilling firms are competing “on a level playing field against foreign oil” and to wage a fight against “misinformation spread by foreign celebrities, radical environmentalists and grandstanding politicians.”
Krausert concedes it is not easy to raise the capital to build new-age rigs that can cost about C$25 million, even though his so-called programmable unit can be contracted for C$18,000 a day.
However, there is a race against time for contractors as Canada’s largest banks brace themselves to cover potential energy-related losses.
| 
