More than 20,000 jobs on the line as Canada’s oil drilling rig fleet shrinks

Towering bone-dry oil derricks, idled drilling rigs and rows of unused trucks line the commercial yards on the outskirts of Edmonton. In years past, these yards could be empty in February, which is prime here we are at crews of roughnecks and other workers to become in the oilfields of rural Alberta drilling for crude.

People in the drilling industry frequently call the busiest time of the year – in the tail end of December right through to March – “100 times of hell,” however this year it might be better described as 100 times of boredom. Drilling activity in Canada has fallen to 30-year lows, said Western Energy Services Corp. leader Alex MacAusland throughout an earnings call on Friday.

Three of every four drilling rigs in Canada are sitting idle so far in February, and analysts believe the yards will remain full in the future weight loss service companies idle, retire or try to sell equipment that isn’t being used.

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Analysts now say there is simply too much equipment open to do too little operate in Western Canada’s oilfields. As a result, the service industry needs to shrink, and the downsizing might be permanent.

The Canadian Association of Oilwell Drilling Contractors (CAODC) forecasts there will be 60 to 70 fewer drilling rigs in the united states at the end of 2016, which is a contraction of about 10 %.

That number could be even higher. BMO Capital Markets analyst Michael Mazar said he expects between 100 and 150 drilling rigs is going to be permanently retired in Canada this year.

“Given where utilization levels are, and given that we’re said to be in the middle of winter drilling season and also the rig count is already falling, I’d expect that we’ll see rigs taken out of the market entirely,” Mazar said.

The CAODC estimates that each active drilling rig supports 135 direct and indirect jobs, so a shrinking quantity of drilling rigs means a lasting reduction in employment through the oilfield service industry.

Using that math, the retirement of 150 drilling rigs could cause the permanent disappearance of 20,250 jobs.

“I think there’s some permanent damage that’s occurring right now around the labour front. Whenever we went through the ’08 and ’09 downturn, we lost people and they never came back,” CAODC president Mark Scholz said.

As job losses still 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 how big 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 dispose of those rigs. We’ll scrub off all of the parts we are able to use and also the pieces we are able to use on the drill pipe. But we’ll dispose of the rig assets either as parts or rigs,” Precision leader Kevin Neveu said throughout 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 more pressure rigs,” he added.

Precision may be the first in Canada to transition its entire fleet to newer “high spec” rigs, and it recorded $369 million in impairment charges to decommission its older rigs in the fourth quarter.

Other information mill likely to follow, although analysts say companies for example Precision possess a jump.

Increasingly, oil and gas information mill demanding the newer rigs simply because they can drill a lot sooner, require fewer people to operate and therefore are safer to run compared to older rigs.

Drilling rig technologies have dramatically changed in the past Ten years, BMO’s Mazar said. There’s more automated equipment currently available and those rigs are 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 requirement for a crew to move the rig between two wells close.

“When you appear in the right equipment to drill the kind of wells that are getting drilled today, you’ll need a different type of drilling rig,” Ernst and Young’s national energy leader Barry Munro said. “Right now, you’re going to wish to have drilling systems which are as automated as you possibly can and as fit for purpose as possible,” he explained.

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 market share in 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 which are “no more in use within the contract drilling segment.” Utilization on those rigs declined 77 per cent in the fourth quarter. Activity on its larger rigs also declined, although not as sharply.

Western explained in a release that “changes in the rig mix, as competitors still 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 think 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 everything is especially dire for companies with higher proportions of small rigs in their overall fleet. He downgraded the stock of Trinidad Drilling Ltd., with a large quantity of bigger, deeper rigs but also spent $505 million in 2015 to purchase 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 towards the bigger rigs.

“Our expectation is that fewer rigs are going to be working in a play in the next cycle due to drilling efficiencies such as a greater amount of pad drilling and fewer capital being deployed,” Gillies said.

Mazar said there are 400 to 450 high-efficiency drilling rigs sitting idle right now.

“As soon as the rigs start returning to work, you’ve got to absorb those 450 rigs first, before – I’m exaggerating a bit – you put the first tier 2 rig to work,” he explained. “As long as the marketplace stays like this, those (smaller) guys can’t compete. The only reason they’re competing now is they’ve contract coverage on some of the people rigs that might have been signed 2 yrs ago.”

gmorgan@nationalpost.com

Twitter.com/geoffreymorgan