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Canada’s service sector looking sickly Canadian natural gas industry in swoon, thousands of jobs disappearing; high storage levels, U.S. LNG imports part of grim outlook Gary Park For Petroleum News
The trickle-down effect has turned into a cascade, swamping some of the smaller Canadian oil and gas service and supply companies, especially those who overreached during the natural gas boom times of two years ago and are now reeling from a prolonged slump.
Barely 40 percent of the publicly traded service companies recorded profits in the second quarter and the overall group lost C$292 million, compared with earnings of almost C$450 million a year earlier when they were riding the wave of a record winter drilling season.
Since the start of 2007, 10,000 of 68,000 jobs in the service industry have disappeared and similar number have been lost among drilling contractors in one of the most punishing periods in recent years.
Don Herring, president of the Canadian Association of Oilwell Drilling Contractors, said laid off rig hands are moving into sectors such as the oil sands where pay increases are locked in.
As a result, even if conditions improve this winter, contractors will have a tough job attracting experienced workers.
Roger Soucy, president of the Petroleum Services Association of Canada, said the bloodletting will likely eliminate some companies, either through bankruptcy or mergers and acquisitions.
Smaller companies hardest hit The heaviest toll will occur among smaller companies and trusts that responded to the drilling frenzy of two years ago, went on a capital spending spree and over-extended their credit limits.
They are now paying the price, with drilling down 40 percent from a year ago and rig utilization at 36 percent in August compared with 65 percent a year ago, resulting in an equipment surplus and job shortage.
Much of the attrition has stemmed from those companies that offered base salaries with bonuses for each job. As the contracts have faded so has the desire among many workers to stick around.
Soucy warned that such a trend poses a worry when a rebound takes place because many workers will have found jobs elsewhere and won’t be anxious to rejoin the petroleum industry.
He said the greatest hope now is that problems created by warmer-than-usual winters will find an answer in a return to colder weather.
But the outlook for the gas sector is being portrayed by some analysts as flat-out dismal.
Canada can’t match LNG prices Paul Ziff, chief executive officer of the research firm Ziff Energy Group, said liquefied natural gas is arriving in the United States at prices Canadian producers can’t match.
He told the Canadian Association of Drilling Engineers it will take a Herculean effort by the Canadian industry to roll back costs and regain its competitive edge.
Ziff said the Canadian gas sector is not experiencing a regular cycle, noting that the robust profits being posted by some oil and gas companies are inflated by returns from oil or old gas reserves that were cheaper to find.
As far as new gas reserves are concerned “we are probably under water,” he said.
Ziff said that large volumes of LNG being dumped in the United States during summer to take advantage of large storage facilities that are not available elsewhere in the world further exacerbates the high costs in Canada.
He estimated that new Canadian gas reserves need prices close to US$8 per million British thermal units to be profitable, close to US$3 higher than recent prices in New York.
Ziff said the breakdown of costs for finding new reserves is 42 percent for drilling and well completions, 27 percent for land and seismic, 24 percent for operating costs and 7 percent for administrative expenses.
Gas inventories near glut Martin King, a commodities analyst for FirstEnergy Capital, said North American gas inventories are rapidly closing in on last year’s glut level, further undercutting any hopes of a rebound in the fall or winter.
He suggested there is unlikely to be a sustained uptick until well into next year given the latest trends, which include a drop of 3 percent in New York gas prices for August delivery to US$5.86, the lowest point since the end of December. Spot prices at the Alberta AECO hub were off 7 percent.
King said FirstEnergy is projecting October storage numbers will be more than 3.5 trillion cubic feet, less than 100 billion cubic feet from peak storage.
He said Canadian production is down 300 million cubic feet per day this year if viewed as a 12-month average and off 1 billion cubic feet per day on a month-over-month basis.
So far, there has been no sign of a price recovery to that decline because of the high storage level in the U.S. because Canadian supply losses have been offset by U.S. LNG imports.
FirstEnergy analyst Kevin Lo said all of the factors at play — weak prices, bulging inventories, a strong Canadian dollar, spending cutbacks and a surplus of available rigs — point to an industry shake-out in 2008.
He said a scaling back of equipment is needed given that the industry has enough capacity to drill 25,000 or more wells a year and forecasts suggest the total will be less than 20,000 next year. (PSAC is forecasting 17,650 wells in Canada this year, down 24 percent from 2006, and CAODC expects this year’s well count will be short of its May prediction of 16,339).
Lo said the answer lies in a round of mergers and acquisitions during the winter drilling season
With some companies opting to sell rather than waste their cash resources, he said.
Lo said the rise in the Canadian dollar means AECO spot prices have not changed in five years and the current prices offer no support for additional drilling in Western Canada.
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