Rigs on the comeback trail with high oil

Share

It was the unmistakable sound of a comeback: the clank and grind of steel penetrating deep into the earth echoed loudly across the forests and muskeg of Alberta this winter.

The oil rigs had returned, and with a roar. Two years after the world fell apart for the oil patch, numbers from this winter drilling season show that it has leapt back together, creating a frenzy of activity not seen since the heights of the last boom. So much drilling work has returned to the West - and especially Alberta - that oil field service companies are once again talking about jacking up wages and raising their day rates as they attempt to meet a new demand surge.

The first quarter of 2011 saw, on average, 68 per cent of Canada's drilling fleet back to work - a number that is nearly double the all-time low of 37 per cent seen in the same period of 2009. And the rate could have been higher had companies not had so much trouble finding workers that they were forced to park rigs.

There is a simple, one-word reason for the surge: oil. Traditionally, 70 per cent of Western Canadian wells have chased natural gas . Today, with crude prices soaring, alongside natural gas that continues to scrape bottom, the inverse is true. Nearly three-quarters of the work is oil-focused as companies use new horizontal drilling techniques to wrest more crude from reservoirs long considered tapped out.

Triple-digit crude prices have made it hard to find any oil play that's not profitable.

"We've definitely changed focus," said Trent Yanko, chief executive officer of Legacy Oil + Gas Inc., which recapitalized in 2009 to create a company focused on crude. Alberta, he said, is flirting with a 40-year record on most oil wells drilled in a year. The need for rigs that can efficiently use new oil drilling techniques is growing strong enough that Legacy is considering contracting its own custom equipment.

"We are looking at some options of maybe securing some special purpose-built rigs later this year," he said. "If we can be a little more efficient, maybe we can hold the line on cost."

The only snag has been finding enough people to dig into those underground barrels. Take Nabors Canada, for example. The drilling company had demand for 63 rigs this winter, traditionally the busiest season since frozen ground allows better access to some of the remote areas where oil and gas is found. But it only put 53 out in the field.

There was "a tremendous shortage of experienced people, and we took the position not to put rigs to work," said Nabors Canada chief executive officer Joe Bruce. He didn't want "a whole bunch of inexperienced people on the rigs that would eventually lead to somebody being hurt."

But for an industry that has climbed back from a cliff, worker shortages are a good problem to have. They are a certain indication that, even in the face of natural gas prices that continue to drag bottom, the revitalization of the Canadian oil patch is taking root.

After 2005 and 2006, when 83 and 90 per cent of the drilling fleet were in first-quarter use, respectively, the numbers have stayed low. In 2007, 62 per cent of rigs were turning; in 2008, 56 per cent; in 2009, 37 per cent. Even last year, amid the promise of better royalties, only half of the fleet was at work.

This year looks even better when the actual number of rigs is taken into account. Because the size of the Canadian fleet has grown, 2011 actually saw more rigs at work than even 2006.

"We're quite encouraged," said Don Herring, president of the Canadian Association of Oilwell Drilling Contractors. "We believe that we're starting to get more into an environment where we'll start to see some more steady activity."

Indeed, demand is strong enough that Precision Drilling Corp., which runs a quarter of the Canadian fleet, is building five new rigs this year, and is hinting that more may be on the way.

"We'll have further news" in the company's quarterly earnings call Tuesday, chief executive officer Kevin Neveu said in an interview. "We've been very clear there's very strong interest from customers for building. And these are for oil."

In part, the new construction is needed because only about half of the 791 rigs in Western Canada are suitable for the demands of new horizontal wells. As the work for older rigs diminishes, "there is some need of revitalization" of the fleet, Legacy's Mr. Yanko said.

There will also likely be a need to start boosting costs. Drilling companies trimmed wages by nearly 9 per cent two years ago, and despite a 3.5- to 4-per-cent increase last year, they have yet to return to earlier levels. Industry executives say that's now a priority - and analysts warn that the result of all this activity will be higher prices.

"Pricing increases are likely to happen here for summer work. And if the fourth quarter is setting up to be as busy as I think, you'll get another one," said Scott Treadwell, an analyst with Macquarie Capital who believes back-to-back 5-per-cent hikes are likely.

But industry is unlikely to balk at those increases, especially with oil comfortably in triple-digit territory, he said.

"When you talk about oil at $100 (U.S.), there's not much drilling in Western Canada that's not economic," he said. "And you've certainly got a little more certainty from the producer side that six months from now, their cash flow is not going to zero."