Towering bone-dry oil derricks, idled drilling rigs and rows of unused trucks line the commercial yards on the outskirts of Edmonton. Years back, these yards could be empty in February, that is prime here we are at crews of roughnecks along with other workers to be in the oilfields of rural Alberta drilling for crude.
People in the drilling industry frequently call the busiest season – in the tail end of December through to March – “100 times of hell,” but this year it might be better referred to as 100 days of boredom. Drilling activity in Canada has fallen to 30-year lows, said Western Energy Services Corp. chief executive Alex MacAusland during an earnings ask Friday.
Three of every four drilling rigs in Canada are sitting idle so far in February, and analysts believe the yards will stay full in the future as more service companies idle, retire or try to sell equipment that isn’t in use.
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Analysts now say there’s way too much equipment open to do not enough work in Western Canada’s oilfields. Consequently, the service industry must shrink, and also the downsizing could be permanent.
The Canadian Association of Oilwell Drilling Contractors (CAODC) forecasts you will see 60 to 70 fewer drilling rigs in the country after 2016, which is a contraction of about 10 per cent.
That number might be even higher. BMO Capital Markets analyst Michael Mazar said he expects between 100 and 150 drilling rigs will be permanently retired in Canada this season.
“Given where utilization levels are, and considering that we’re supposed to be in the middle of winter drilling season and the rig count has already been falling, I would expect that we’ll see rigs taken out of the market entirely,” Mazar said.
The CAODC estimates that every active drilling rig supports 135 indirect and direct jobs, so a shrinking number of drilling rigs means a lasting reduction in employment throughout the oilfield service industry.
Using that math, the retirement of 150 drilling rigs could result in the permanent disappearance of 20,250 jobs.
“I think there’s some permanent damage that’s occurring right now on the labour front. Whenever we experienced the ’08 and ’09 downturn, we lost people plus they never came back,” CAODC president Mark Scholz said.
As job losses continue to mount, the entire process of permanently retiring drilling rigs has started.
On February 11, one of the largest oilfield service companies in Canada, Precision Drilling Corp., announced it was retiring all 79 of their remaining older, less-efficient drilling rigs worldwide, thereby shrinking the size of its fleet to 238 “tier 1” rigs worldwide. In the past six years, the company has decommissioned as many as 236 older rigs.
“We’ll get rid of those rigs. We’ll scrub off all the parts we can use and the pieces we are able to experience the drill pipe. But we’ll dispose of the rig assets either as parts or rigs,” Precision leader Kevin Neveu said during his company’s fourth-quarter earnings call.
“We don’t anticipate they’ll return to compete against us because we’re either operating deeper, bigger rigs internationally or higher pressure rigs,” he added.
Precision may be the first in Canada to transition its entire fleet to newer “high spec” rigs, also it recorded $369 million in impairment charges to decommission its older rigs within the fourth quarter.
Other information mill likely to follow, although analysts say companies for example Precision possess a head start.
Increasingly, gas and oil companies are demanding the newer rigs simply because they can drill in less time, require fewer individuals to operate and are far better to run compared to older rigs.
Drilling rig technology has totally changed previously Ten years, BMO’s Mazar said. There’s more automated equipment currently available and people rigs tend to be more efficient, allowing smaller crews to drill deeper as well as in less time.
For example, many new drilling rigs today have hydraulic legs that allow them to “walk” like robots between two wells, which eliminates the need for a crew to maneuver the rig between two wells in close proximity.
“When you appear in the right equipment to drill the kind of wells that are getting drilled today, you’ll need a different kind of drilling rig,” Ernst and Young’s national energy leader Barry Munro said. “Right now, you are going to wish to have drilling systems that are as automated as you possibly can and as fit for purpose as possible,” he said.
Precision will run only “tier 1” or high-spec rigs and, Mazar said, is modelling itself after Tulsa, Okla.-based Helmerich & Payne Inc., which “has gained enormous share of the market within the last 10 years due to high-spec rigs.”
Western Energy Services on Thursday reported it took a $26.6-million charge to decommission equipment on its smaller, shallower-reaching rigs that are “no more in use in the contract drilling segment.” Utilization on those rigs declined 77 percent within the fourth quarter. Activity on its larger rigs also declined, but not as sharply.
Western explained inside a release that “changes in the industry rig mix, as competitors continue to decommission older and shallower rigs within the Western Canadian Sedimentary Basin, and add predominantly higher specification rigs that directly contend with Western’s drilling fleet, impacts Western’s relative utilization than the CAODC industry average.”
Many analysts believe that companies for example Precision and Western, and larger U.S. competitors with higher-efficiency fleets like Helmeirch & Payne and Nabors Industries Ltd., are poised to push companies with smaller rigs out of the market.
Mazar said the situation is especially dire for businesses with higher proportions of small rigs within their overall fleet. He downgraded the stock of Trinidad Drilling Ltd., with a great quantity of bigger, deeper rigs but also spent $505 million in 2015 to buy CanElson Drilling Ltd., whose fleet is comprised primarily of smaller rigs.
TD Securities analyst Scott Treadwell and FirstEnergy Capital Corp. analyst Ian Gillies both said in research notes that companies with older, slower rigs already are losing drilling jobs and share of the market to the bigger rigs.
“Our expectation is that fewer rigs will be working in any given play in the next cycle due to drilling efficiencies like a greater quantity of pad drilling and fewer capital being deployed,” Gillies said.
Mazar said there are 400 to 450 high-efficiency drilling rigs sitting idle at this time.
“As soon because the rigs start returning to work, you need to absorb those 450 rigs first, before – I’m exaggerating a little bit – you put the very first tier 2 rig to work,” he explained. “So long as the market stays such as this, those (smaller) guys can’t compete. The only real reason they’re competing now’s they have contract coverage on some of those rigs that might happen to be signed two years ago.”
gmorgan@nationalpost.com
Twitter.com/geoffreymorgan
