Oil and gas sector moves from ‘hell’ to ‘purgatory’

Oil and gas drillers, frackers and other service companies have been through the depths of “hell” during the downturn but now appear to be in purgatory, industry forecasters said Thursday.

A new oil and gas drilling outlook suggests the sector is performing far better than previously expected as momentum continues to build after a prolonged slump that sowed widespread pessimism.

Alberta is expected to lead the way as nearly 6,700 wells are forecast to be drilled across Canada this year, up 30 per cent from a January outlook, according to the Petroleum Services Association of Canada. Mark Salkeld, the group’s president, said stabilized oil prices, improved confidence among oil and gas producers and a drive to cut costs within the industry are behind the latest surge in activity.

But the optimism follows considerable dread.

“Those cost cuts came from massive layoffs, racking equipment, wage rollbacks, bonuses cut, benefits cut — it was just hard-core slashing prices so that we could continue to work,” Salkeld said.

“It’s been hell. It’s just been absolutely hell on the pricing. We’re coming out of it.”

After OPEC and non- OPEC countries agreed to limit their production to stabilize oil prices, drillers and other service companies have seen a resurgence of activity and improved prices, although several companies have reported prices remain below sustainable levels.

Despite the momentum, drilling activity is far below what the industry reported in pre-recession 2014, when 11,200 wells were drilled.

Salkeld said roughly 3,300 wells will likely be drilled in Alberta by the end of the year, up 23 per cent from January’s forecast and 75 per cent from the initial drilling outlook published in November.

In that first forecast, drilling activity in 2017 was expected to be slightly higher in Saskatchewan than in other Western provinces, but as the industry’s slow recovery began to take hold, drilling expectations in Alberta surged ahead. About 2,700 wells are now forecast to be drilled in Saskatchewan.

“Right across the (western Canadian) basin, the sector kicked butt,” Salkeld said, referring to activity in the first three months of 2017.

According to CIBC Capital Markets, oilfield services companies across North America saw prices fall by an average of 40 per cent to 45 per cent late last year from a 2014 peak, but analysts believe there are “clear signs of some pricing increases over 2017.”

“We’ll never go up as quickly as we came down, but we are starting to see pricing come off the bottom,” said Jon Morrison, analyst at CIBC Capital Markets, calling 2017 “the year of oilfield services purgatory.”

“It’s not heaven or hell, but somewhere in between.”

Precision Drilling Corp., Canada’s largest driller, said this week it hit a seasonal peak of 91 active rigs in the country during the first quarter, nearly 50 per cent higher than a year earlier.

Buoyed by three consecutive quarters of increased activity, the company said it has rehired more than 2,000 field workers and activated more than 100 rigs since the downturn hit a trough last year.

Precision said in its first-quarter earnings report that while demand for its rigs in Canada rose significantly, prices here have not increased with the same magnitude as they have in the United States, due to seasonal timing of its negotiations with Canadian customers.

Still, the company expects prices for rigs above the 49th parallel will improve throughout the year.

Fracking company Calfrac Well Services Ltd. said this week that prices for its services were rising in the U.S. roughly three months ahead of those in Canada. Chief executive Fernando Aguilar said some competitors are still bidding lower prices to secure work.