Canadian oilpatch faces steep competition from U.S. producers

Drilling rigs heading south to extract oil from shale plays,

The Canadian oilpatch has a full plate of problems to grapple with this year, enough to give it heartburn — from steep price discounts for heavy crude and natural gas to the ongoing pipeline conundrum.

But another issue also lurks on the investment horizon: the lure of the United States.

Booming shale oil plays south of the border, explosive growth opportunities and tax reform are all making the U.S. an attractive place for producers to invest in this year — and these factors could make Canada a less-lucrative option going forward.

Drillers and oilfield services companies that operate on both sides of the border say these trend lines are already lining up.

So far in 2018, U.S. activity is up from the same time a year ago, but remains “largely flat in Canada,” Calgary-based Precision Drilling Corp. said in its fourth-quarter earnings report.

Canada’s largest driller noted by Feb. 9, the number of active rigs in the U.S. had increased about one-third from the same point last year, while the Canadian count had dropped about eight per cent.

Although Precision has no plans to shift assets south, some Calgary-based players have been moving rigs into the lower 48 states, including Akita Drilling Ltd. and Trinidad Drilling Ltd.

These drillers moving rigs are hoping to take advantage of the prospect of more work and higher rates for their services and equipment on the other side of the 49th parallel.

“It doesn’t matter whether you’re a one or two-rig company or you’re a large publicly traded company, it’s very enticing to look at the U.S. market right now,” said Mark Scholz, president of the Canadian Association of Oil Well Drilling Contractors.

“As a Canadian, this means equipment goes down to the U.S., it means we’re going to be hiring (less) and we’re going to be maintaining less crews up here.”

The prospects for the energy sector in Canada and the U.S. are diverging as this year progresses.

A report by GMP FirstEnergy this month forecasts Canadian drilling activity in 2018 will drop by eight per cent; in the U.S., drilling is projected to increase by eight per cent.

As enticing shale oil plays such as the Permian Basin in Texas pull more spending into their orbit, production keeps growing.

Total American oil output recently hit 10 million barrels a day for the first time since 1970 and is still headed higher this year.

Meanwhile, the Canadian drilling outlook remains relatively flat for the year, even with benchmark U.S. oil prices closing Tuesday at US$61.90 a barrel.

A recent forecast by the Petroleum Services Association of Canada backs up the sluggish sentiment. It lowered the number of wells it expects to see drilled in Canada this year to 7,600, down about four per cent from its October projection.

Although drilling levels have stabilized since oil prices collapsed in 2015-16, today’s outlook is hampered by the steep discount Canadian heavy oil faces due to pipeline constraints, as well as weak natural gas prices seen in Alberta, said PSAC chief executive Mark Salkeld.

Meanwhile, recent U.S. tax reforms are making it more attractive for Canadian firms to look at the American market for potential investments.

“The U.S. is kicking butt big time and there are opportunities — and our members and other oilfield services companies are following it,” said Salkeld.

Oilfield services firms are keeping a close eye on the crossborder disparity.

Calfrac Well Services Ltd., a Calgary-based fracking company that operates on both sides of the border, hasn’t announced any plans to move equipment, but the idea is “definitely under consideration,” said vice-president Scott Treadwell.

In the U.S., more equipment is required and more staff is being hired by the Canadian company to keep up with growing demand.

In Canada, the response is more muted, and the uncertainty caused by pipeline woes and other regulatory issues has tempered expectations for 2018.

Uncertainty has a funny way of shaking optimism and investor confidence. But in the U.S., there’s plenty of investment and activity in the oilpatch in 2018 — and the disparity with Canada should be a cause for concern on this side of the border.