Low commodity prices have prompted the Canadian Association of Oilwell Drilling Contractors to revise its annual drilling activity forecast for 2015. CAODC expects a fleet utilization rate of just 26 per cent in 2015 for service rigs and drilling rigs based on WTI oil at US$55 a barrel. Decreased drilling activity could lead to the loss of 23,000 direct and indirect jobs. CAODC president, Mark Scholtz spoke to Pipeline News about the impact of the slowdown on his industry during a phone interview on Jan. 23 with oil hovering around $45 a barrel.
Pipeline News: Is this the first time you’ve had to revise your drilling activity forecast?
Scholtz: It is not. We revised it once before and that would have been in 2009.
PN: How does this downturn in the industry differ from the last one in 2009?
Scholtz: Well, I think there are a number of things at play here. In 2009, we had a financial market collapse so we had difficulty raising capital. We were in a recessionary position globally.
This time, we’re in a situation of slow growth and we have an increase in supply of crude.
Five years ago, I don’t think anybody predicted the level of production that we would see in the United States in excess of five million barrels per day.
So the added supply in the market has really changed the dynamic of crude in a global sense and this is a global business. We are responding to slow growth globally and an increased supply.
PN: Are there any lessons learned from 2009 that can apply this time?
Scholtz: I don’t think you can compare the two. Every bust has its own scenarios and factors that are in play. You go back to the ’80s where a lot of that was related to government intervention – and the ’90s were different.
Today it’s just – we deployed these technologies in North America that allowed us to go back to plays that we once thought were uneconomical.
But the introduction and the feasibility of new drilling technologies and techniques have made those plays economical at the price point that we saw eight or nine months ago.
Now fast forward eight months with 65 per cent erosion in pricing – most of these plays in North America can’t even break even.
PN: What are companies doing to weather the storm in 2015?
Scholtz: Well, there’s a number of things. They have to seriously look at all of their operating costs, SG&A (selling, general and administrative expenses) all the way down to everything from specific things related to field operations.
So it really is a matter of making sure you’re running as efficient and as a lean as possible.
Even with a forecast of 26 per cent utilization similar to what we saw in 2009, the work just isn’t there. In January of last year we were at about 65 or 70 per cent utilization. Today we’re below 50 per cent.
So even in January in our busiest time of the year we are just not there.
PN: What are your thoughts on the potential for 23,000 job losses in 2015 from reduced drilling activity?
Scholtz: That’s a pretty incredible number. That’s the reality of how important this industry is both from a direct employment perspective and indirect.
There a number of people that are going to be impacted – families, workers. We just hope this doesn’t stay this way for long.
PN: Is this potentially the worst downturn for job losses by your industry?
Scholtz: I can’t really comment. I haven’t done an analysis back beyond 2009. All I can say is the numbers are daunting. It’s 23,000 jobs that are threatened. This is a serious matter.
PN: Who gets hardest hit in your industry by this reduction in drilling activity?
Scholtz: Well, initially right at the start it’s service companies because from a cash flow perspective if a service rig or a drilling rig contractor is not working they don’t have cash flow – zero cash flow.
Producers at this stage have the benefit – although they are making 65 per cent than they were making eight months ago they still at least have cash flow that’s coming in.
They’re still making $55 a barrel (forecast assumption) although it’s a reduced amount and certainly when you look at stock valuations and market cap, those have all been impacted.
It’s the service rig contractors and the drilling rig contractors and the rest of other services that certainly are pivotal in a getting a well to completion. Those are the guys who get hit first.
PN: What are service rig and drilling companies doing to keep laid off workers in the loop?
Scholtz: That is going to be probably one of the toughest things that contractors are going to have to deal with.
We’ve seen this back in 2009 where so many talented folks didn’t have work and ultimately a lot of them left the industry, and when things revived in 2010 they never came back.
Contractors are going to have to try their darnedest to maintain those senior key people for as long as they possibly can because, ultimately if they don’t, there’s a possibility they may not come back in the industry when things turn around.
PN: How tough will it be to retain key positions knowing labour has been a key issue since 2009?
Scholtz: It’s huge. That’s our core asset. For a drilling and service rig contractor, our core asset is our equipment and our people.
Our equipment isn’t being used and therefore second asset which is our people aren’t being deployed.
It’s going to be difficult 2015 trying to hold on to as many key people as you can with depressed activity. It’s very difficult to do.
PN: How does the estimated $23 billion cuts to capital spending by oil and gas companies affect your members?
Scholtz: Our members would be the ones that would be investing in new rig assets.
The operators when it comes to the $20 billion plus dollars that aren’t going to be spent on capital, means that they won’t be using our equipment as often and as frequently.
So again that’s kind of factored into this equation.
The producers in this industry really set the tempo for activity, so if the producers are pulling back on capital it means they are pulling back on new wells that are going to be drilled and fewer rigs that are going to be utilized.
That’s kind of where this utilization forecast comes in (26 per cent for 2015).
PN: Is there any signs of industry panic if there is no substantial relief in sight for commodity prices?
Scholtz: I don’t know if I would describe it as panic as much as we know we’re going into a depressed year.
But for me it’s ‘okay this is a cyclical business,’ we’ve seen these lulls before. We are going to get out of this at some point.
If our forecast is right and it’s 26 per cent do we come back in 2016? Is it 2017? I’m not sure, but we will come back.
Let’s not forget that hydrocarbons are a demanded commodity globally. We have China that will continue to grow.
The United States is beginning to see some economic revival. Europeans of course, obviously they’re growing at the rate that the Chinese or what the Americans are soon to be, but I think overall this is still a long term positive industry to be in.
It’s just when is this going to happen?
PN: What kind of potential opportunities are out there in this particular slowdown?
Scholtz: I think there’s an opportunity here as Canadians to say ‘okay we’re in a situation where we’ve got depressed prices, we’ve got lower overall oil and gas activity, let’s take some of those folks that would typically work directly for the oil and gas industry and start building some pipelines.’
So that when we do come out we’ve got greater access to the Asian markets and we’ve got greater access to south of the border.
This could be an opportunity for us to look at getting some pipe in the ground and positioning ourselves to really succeed as an industry when it comes around.
PN: Are some oil and gas plays are more active due to high netbacks?
Scholtz: I wouldn’t feel comfortable getting into specific companies or plays. Certainly, what I can say is the economics do change from play to play, but overall $45 (a barrel) right now– it’s pretty tough to make money on any play.
PN: Do you have a crystal ball on when we can expect prices and activity to recover?
Scholtz: If I did I’d be a richer man than I am today. I’m not going to speculate. All I can say is this is the forecast.
If it’s executed fully, it’s 26 per cent utilization – almost as worse as what we’ve seen in 2009.
Let’s hope the upturn comes sooner than later.