Canada’s oil and gas drillers face permanent contraction

Drilling, Canada, Shale, oil, rig count

Reuters – Canada’s drilling rig count, a bellwether of the oil and gas industry’s growth, has plummeted far below previous records, raising risks that much of the country’s equipment will permanently fall out of service.

Just 18 rigs were active last week in the world’s fourth-largest oil-producing country, a fraction of even the depressed levels of a year ago, according to Baker Hughes data.

The fleet looks likely to shrink 25% in the next year from the current 500, as companies decide against costly recertifications of equipment, said Kevin Neveu, chief executive of Precision Drilling Corp, one of Canada’s biggest drillers.

The Canadian energy industry has struggled for years, and its services sector, which drills and maintains wells, may face a longer recovery than rivals in the United States, where companies say capital is more accessible. A service sector contraction would limit any industry rebound once the coronavirus pandemic wanes and oil demand returns.

“This is the hardest sharpest downturn the oil services industry has ever faced,” Neveu said in an interview. “It’s worse in Canada because it was already at the tail end of a four-year downturn.”

Just six oil drilling rigs were active as of July 2, along with 12 gas rigs for a total of 18 – compared with 120 rigs a year earlier, according to Baker Hughes, a U.S. service company that has conducted such counts since 1975.

It marked a rare week-to-week increase from 13 rigs, reflecting the seasonal summer pickup when the ground dries from spring snowmelt.

Most of Canada’s oil comes from the oil sands, long-life facilities that do not require regular drilling like shale or conventional production.

Recertifying a drilling rig can cost as much as C$2 million ($1.48 million), depending on the size, Neveu said. Those that are decertified may be scavenged for parts or auctioned.

More of Calgary-based Precision’s business is likely to tilt to the United States in the coming years, where it expects a quicker rebound, Neveu said.

With fewer wells drilled, work has also dried up for companies that service them.

Roll’n Oilfield Industries has serviced wells since 1977 but has never seen business this slow, said President Brad Rowbotham. The company is operating just 20% of its rigs, forcing it to eliminate jobs and cut salaries.

“There’s days when there’s none working,” he said.

Two of Roll’n’s rigs are overdue for recertification, but the company has parked them instead. It has no plans to sell them because sale prices have plummeted.

In Edson, Alberta hopes that the oil town of 8,400 people could reverse its downturn as work begins on expanding the Trans Mountain pipeline, have been dashed.

“With less drilling happening, coupled with COVID-19, we see lots of empty hotel rooms and empty restaurants,” said Mayor Kevin Zahara.

Contraction of the drilling and service industry would make it difficult for oil and gas producers to boost output once the industry rebounds, said Darren Gee, chief executive of Peyto Exploration & Development Corp, one of a handful of producers still actively hiring drillers.

“There is a symbiotic relationship,” he said. “We have to keep service companies alive or the producers eventually die.”

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