Low demand for rigs, workers, exodus to US, seen as potential industry collapse
for Petroleum News
It’s rare, if not unmatched when leaders of Canada’s petroleum industry speak in such openly bleak terms about their business.
For a sector that is better known for its boldness and upbeat style in the face of adversity, recent weeks have been marked by language unheard during the 70 years since Canada joined the ranks of international oil and gas producers.
Leading the way, the Canadian Association of Oilwell Drilling Contractors said that following Canada’s federal election in mid-October, which handed the balance of power to openly anti-industry parties, “the sentiment toward Canadian oil and gas is nearing all-time lows.”
The lobby group for upstream companies said its sector has lost out on billions of dollars in foreign capital, while layoffs for hundreds of workers continue as drillers take jobs and rigs with them to the United States.
The unmistakable trends are widely interpreted as an “I told you so” payoff for a growing burden of regulatory moves by the Canadian government and a failure to proceed with new oil pipelines.
CAODC said Alberta’s rig fleet is expected to continue shrinking in 2020 by 48 to 497 rigs, while jobs in the drilling sector will end next year at about 22,313, compared with 36,044 in 2018.
PSAC sees 10% drop in wellsBad as the forecast was, it was slightly more positive that one released at the start of November by the Petroleum Services Association of Canada, which called for a 10% drop in wells next year to 4,500, compared with CAODC’s targeted 4,905.
“If we do not create an environment where the oil and gas industry can compete internationally, we won’t have an industry left in this country,” said Mark Scholz, president of CAODC. “The exodus is happening at an alarming rate.”
He noted that the industry has lost C$30 billion in foreign capital since 2017, leading to the relocation of at least 29 high performance rigs and their crews to the United States.
Kevin Neveu, chief executive officer of Precision Drilling, Canada’s largest contract drilling company, said the oilfield service sector in Canada is facing “all-time lows in demand for our services.”
In the past year, service companies, the workhorses of the industry who are the first to feel the pinch when capital spending is cut, have seen their share values drop 28%, said RBC Dominion Securities.
Neveu said 70% of Precision’s business is now done outside Canada and, although he prefers to keep the company head office in Calgary that could change if there is another meaningful downturn in the company’s fortunes.
AKITA Drilling Chief Executive Officer Karl Ruud said his company did no business in the United States three years ago; now the 40 rig operation does 80% of its work there.
“Everyone in this industry has had to lay off multitudes of people” in Canada, he said.
Ruud said the rise of environmental activism and concern about the changing climate has disrupted the industry, but he warns that eventually if there is not enough oil activity and gasoline prices start to soar “you might think twice.”
Kenney pro industryAlberta Premier Jason Kenney, who became a beacon of industry hope when he was elected in a landslide seven months ago, got a rousing reception at CAODC’s annual forecast luncheon as he listed his government’s pro-industry moves.
“These are very challenging times and I know that is felt more in the service sector amongst drillers and contractors than perhaps any other part of Canada’s energy industry,” he said.
The pressure on companies was demonstrated earlier in November by Pengrowth Energy, once among the leaders of Canada’s now-dissolved energy trust sector, when it agreed to be purchased by Cona Resources for 5 cents a share (an acquisition cost of C$740 million), 75% below the stock’s closing price the previous day.
Pengrowth once had more than 600 employees and a market capitalization of C$2.4 billion; it now has a payroll of 90 and produces around 21,000 barrels of oil equivalent per day, led by a highly touted Lindbergh thermal heavy oil project in Alberta.
“There is no capital coming into our business and we are capital consumers,” said Pengrowth Chief Executive Officer Pete Sametz. “There has to be some sense things are going in the right direction at all levels of government.”
Royalty holiday possibilityUnder pressure to provide new incentives to stimulate additional work, the best Kenney could offer was the prospect of a royalty holiday on new drilling activity.
He started with an offer to let producers exceed the government’s output caps if they added incremental oil-by-rail shipments.
Kenney is now examining a request by producers to adopt a royalty credit to incent bigger drilling programs or offer a one-year royalty holiday on new wells that would kick in immediately and expire in mid-2020.
Scholz said that even the measures introduced so far are inadequate, suggesting the “government needs to do something further to incentivize the deployment of capital to get rigs back to work.”
CAODC has also called on the Canadian government to scrap regulatory changes introduced last year to overhaul the approval process for major infrastructure projects and ban oil tanker traffic off British Columbia’s northern coast
As well, the industry group sought a federal guarantee that it will complete the Trans Mountain pipeline expansion “using all available tools and resources.”
Flow to USBut whatever steps might be taken they will be too late to stem the flow of equipment and workers to the United States or the collapse of companies since the oil price crash five years ago.
A new study by consulting firm XI Technologies showed that a year ago a total of 1,334 active companies - publicly traded, privately held or foreign owned - recorded oil or gas production, down 282 from four years earlier, reflecting the strain on investor confidence.
XI data solutions specialist Shovik Sengupta said the data points to a period of significant consolidation.
Tom Pavic, senior vice-president with Calgary-based Sayer Energy Advisors, suggested the picture painted by XI might have been slightly distorted given that missing firms are likely dominated by small players that have lacked the financial backing to drill expensive unconventional wells.
However, the trend identified by XI is consistent with a 31% decline in the number of senior publicly traded energy companies listed on the Toronto Stock Exchange and a 44% falloff in the number on the TSX Venture Exchange.
Direct employment in Canada’s petroleum sector is expected to drop 12,000 jobs this year, according to a new report by PetroLMI, exiting the year at 173,300 compared with 226,500 in 2014.
“There is a lot of fear in this town and it`s accelerating,” said Pengrowth`s Samenz, but one of the companies moving south pointed out it was not an impetuous decision.
Dan Hoffarth, chief executive officer of Citadel Drilling, whose fleet of six rigs is now based in the Permian basin, said that if the company had chosen to remain in Canada it would no longer exist.
But he noted that each rig needed 57 semi-trailer loads of equipment and cost about C$1 million to make the move.
Mark Salkeld, a 35-year veteran of the industry and previously president of PSAC, said the company he now works for, CLEANTEK Industries, has expanded its leasing of drilling and service equipment into the U.S. and “frankly that’s saved our bacon.
“That’s where the opportunity is,” he said. “It’s the smart thing to do if you want to survive.”
Scholz said much of the equipment that has left Canada is among the “best drilling technology in the world. Those rigs are gone. I don’t anticipate they will come back.”