Oil drillers sound alarm as demand hits ‘all-time lows’

Canada’s oil drillers say demand for their services is at historic lows as companies send equipment and people abroad, mainly to the U.S.

Pointing to the foreign capital flight from Canada over the past several years, the Canadian Association of Oilwell Drilling Contractors (CAODC) says while the number of new wells drilled in 2020 will remain flat, the number of rigs in Western Canada will drop to 497 from 545.

“The exodus is happening, and it’s happening at an alarming rate,” the industry group’s president Mark Scholz said Wednesday in Calgary after releasing the CAODC forecast.

Investment brokerage Peters & Co. Ltd. says Western Canada’s rig count is touching on 30-year lows. Drilling work is seasonal, but the CAODC said the total number of jobs will be down almost 40 per cent between 2018 and next year. Precision Drilling Corp.'s Kevin Neveu, who heads the country’s largest contract drilling company, said the oil field-service sector in Canada is facing “all-time lows in demand for our services.”

Energy-service companies are the workhorses of the energy industry: They are the contractors who do the actual drilling, fracking and other jobs for the oil companies that call the shots. They are the first to feel the pinch when capital is cut. The health of oil field-service companies is an indicator of the overall state of the energy sector, and in the past year, Canadian oil field-services stocks have plummeted an average of 28 per cent, according to RBC Dominion Securities.

After an oil-price drop that hit in 2014, the past five years have been bleak for the country’s energy sector. Canadian companies have also long said they are facing a host of special challenges, including a lack of pipeline capacity to ship to global markets beyond the United States. The drillers’ industry association on Wednesday pointed to political decisions as playing a key role in the industry’s decline.

The CAODC wants the federal government to accept Alberta’s rejigged carbon tax on large emitters as robust enough to meet national standards, and to guarantee the completion of the Trans Mountain pipeline expansion. It has called on Ottawa to repeal laws it labels “punitive” – including one that bans oil tankers from docking, loading or unloading oil on British Columbia’s northern coast. It is also asking for Ottawa to drop or amend its Bill C-69 legislation, which overhauled environmental evaluations for energy projects, and which both friends and foes of the oil and gas industry say is likely to stop the construction of any new oil pipelines in the years ahead.

Finally, it wants Ottawa to prioritize the responsible development and export of Canadian oil and gas as an effective means of reducing global greenhouse gas emissions.

Bob Geddes, president and chief operating officer for Ensign Energy Services Inc., said his company runs 300 rigs globally, but only does 17 per cent of its business in Canada. He said each rig is like a mini-manufacturing plant and is responsible for about 150 direct and non-direct jobs. When the rigs move to other countries, so do the jobs.

“We’ve got a federal government in Ottawa that wants to marginalize the oil and gas business for political gains,” Mr. Geddes said. If Ottawa was really serious about the issue of climate change, it would be shipping liquefied natural gas to Asia to displace coal-fired power plants, he added.

Drillers are seizing on small pieces of good news for their sector, such as the Alberta government’s announcement earlier this month that new conventional oil wells won’t be hamstrung by the production limits – or curtailments – put in place in January due to a lack of pipeline capacity out of the province.

The CAODC 2020 forecast didn’t include potential gains from the policy change, but Mr. Scholz called it a positive step toward growth.

Premier Jason Kenney told CAODC members Wednesday he wants to see the end of curtailment over the next year. Until then, the industry will likely retain uncertainties about the impact of the program and the lack of pipeline access.

Companies have had to adjust to a new reality quickly. Two years ago, half of Precision’s work was still in Canada, Mr. Neveu said. Now, 70 per cent of its business is outside Canada and all of the company’s officers are based in Houston to be close to capital and customers.

Its headquarters will remain in Calgary, Mr. Neveu added, but that could change if there is another meaningful shift in the company’s fortunes – such as Canadian investors deciding to pull out of the service sector.

“You know, it’s really hard to operate a business from the location where there are no customers and where there is no business. While Calgary isn’t zero on that front, it’s much lower than the U.S.”

AKITA Drilling Ltd. chief executive Karl Ruud said the Calgary-based company didn’t do any business in the U.S. three years ago. Now, the 40-rig operation does 80 per cent of its work in the U.S. “Everyone that is in the industry has had to lay off multitudes of people” in Canada, Mr. Ruud said.

If there is a faint silver lining to the slowdown of activity in the Western provinces, it’s that Canadian companies have seized a much larger U.S. market share in recent years. Precision, Mr. Neveu said, has more than 8 per cent of the total American drilling market – an all-time high for the company. Canadian drillers as a whole now make up 15 per cent to 20 per cent of the U.S. market, he said.

Mr. Neveu says this could be owing in part to operating efficiencies Canadian companies have mastered by having to operate in short windows due to Canada’s cold climate.

“There aren’t many industries where Canadian companies have a meaningful position in the U.S.” he added.

But the American revenues do not make up for the downward trend in Canadian activity, Mr. Ruud said. And U.S. activity is looking more sluggish, with industry forecasts predicting the shale-oil sector is set for slower growth in 2020.

Mr. Ruud said the rise of environmental activism and concern about climate change has resulted in industry disruption, and some investors are avoiding oil and gas-related stocks. But he believes that, sooner or later, if there is not enough oil activity, gasoline prices will go up.

“When you have to pay $5 a litre for fuel, you might think twice.”

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