The long breakup
Drillers fear seasonal downtime will stretch beyond spring.
It’s spring breakup in the West, a pause in drilling activity unique to the Canadian oil and gas industry when crews move their rigs, wait for the snow to melt and take a break until the terrain dries up.
It came unseasonably early this year, hurried by the oil price meltdown, mild winter temperatures and meagre drilling jobs.
But with no signs that an oil price recovery is on the horizon, fear is taking hold that there won’t be much work in the coming months, either, and that the spring hiatus, usually from early March to mid-April, could stretch into the fall.
“In January, we were a month or two into [the downturn] and most people said: ‘Let’s get through winter drilling and maybe it will all be gone by May’,” said Bill Andrew, chairman and CEO of Long Run Exploration Ltd., an intermediate oil and gas explorer based in Calgary. “If we are still looking at a low price in May, people will just shut it down in the summer.”
Drilling has already collapsed. Only 100 rigs were working this week — barely 13% out of a drilling fleet of 757, down from 246, or 30% of the fleet, at the same time last year, according to the Canadian Association of Oilwell Drilling Contractors. It’s the lowest number since the last oil downturn in 2009 pushed oil prices to even lower levels.
The dismal weekly tally brings to a close a “tough quarter,” said analysts Dan Macdonald and Matthew McKellar at RBC Dominion Securities Inc. The number of active rigs was 44% lower on average than the same period a year ago. The largest pullbacks were in Alberta’s Foothills and Deep Basin regions and in British Columbia, they said in a report.
The mood in the sector across the board is “sombre,” said Gary Leach, president of the Explorers and Producers Association of Canada.
The reasons behind the oil price collapse show no sign of abating: There is still too much production in North America, storage facilities are filling up, demand is sluggish, and after triggering the oil price crash to protect its market share amid growing North American production, OPEC is turning on the taps, increasing its production in an already-oversupplied market.
“People are bracing themselves for a very difficult year,” Mr. Leach said. “It would be foolishly optimistic to see anything but a really tough summer.”
Indeed, CAODC’s latest activity forecast for 2015 — already a sharp downward revision when it was made in January relative to expectations ahead of the OPEC meeting in late November that sent oil on a tailspin — is looking optimistic.
Based on oil prices averaging US$55 a barrel for the year, CAODC predicted a 41% drop in the number of rigs in service in 2015 relative to 2014. Under that forecast, 96 rigs, or 12% of the fleet, were expected to be active in the second quarter; 198, or 25% of the fleet, were supposed to be active in the third quarter; and 234, or 30% of the fleet, were supposed to be active in the fourth quarter.
With oil prices significantly below those levels, a further drop in drilling is likely, said Mark Scholz, president of CAODC, which represents Canada’s drilling and service rig contractors.
“The thing that has caught people off guard is how fast this has happened,” he said. “It’s unprecedented. And unfortunately I don’t see the upside of this going nearly as fast. The longer we’re in this, the longer it’s going to take to get out of it.”
Chief among drilling companies’ concerns is the loss of rig hands, which before the downturn were hard to find. The slowdown is expected to result in at least 23,000 people losing their jobs among those working directly and indirectly on rigs.
The numbers don’t include layoffs in other parts of the energy sector, from oil and gas companies to those who provide other services to the industry.
“In 2009, when we had the last downturn, we lost very experienced hands that ended up leaving the industry and we never got them back,” Mr. Sholz said. “That is the biggest risk factor for the industry as we recover.”
As prevalent and widespread as they have been, layoffs are being used as a last resort. Investment reductions, shorter workweeks, pay cuts, leaves of absence, dividend cuts or suspensions and equity offerings are among the initiatives used across the ol-patch to preserve cash until things get better.
At Long Run, most of the drilling was wrapped up at the beginning of March. The next phase has been delayed until July or August to give the company another two or three months to assess industry conditions.
Long Run axed its capital spending to $100 million for the year, from $250 million last year. Everyone took a pay cut — higher for executives, lower in the ranks. While the first $50 million was to be spent in the early part of the year, the final $50 million is “up in the air” and will be deployed only if industry conditions improve, Mr. Andrew said. Even then, the money may be used for preparatory work rather than drilling.
As it waits for a turnaround, the industry is quiet, he said.
“There is going to be a light at the end of the tunnel,” said the industry veteran. “The question is: how long is the tunnel?”