Canada’s drilling rig fleet has dropped by 300 in five years, and could drop another 100

The drilling fleet may soon be half of what it was in 2014

Estevan –In mid-January 2010, there were 531 rigs working in Canada of 803, or 66.1 per cent utilization. In Oct. 2014, the Canadian Association of Oilwell Drilling Contractors (CAODC) listed 811 drilling rigs on its books. Now, as of Jan. 23, 2020, that fleet has contracted to 515, and hasn’t hit bottom yet. Rig utilization, of the much-reduced fleet, was just 52 per cent.

Over the last five years, Canada’s oil production has grown from just under 4 million barrels per day to just under 4.5 million bpd. Saskatchewan’s production has remained relatively flat, close to 500,000 bpd. Thus, Canada is producing more oil with dramatically fewer rigs compared to five years ago.

(Note: currently oilsands production is 53 per cent in situ, which requires drilling, while mining, 47 per cent, does not.)

Pipeline Newsspoke to CAODC president and CEO Mark Scholz in Estevan on Jan. 16 about this dramatic contraction in the drilling fleet, and what it means.

“There’s been material change in how the business is supplied. The good news is we have 260 rigs working across Western Canada,” he said.

He noted that’s an improvement. Last year, that number was 230 for mid-January. In 2018, it was 348.

Where did the 300 rigs go?

“There’s a number of buckets the decline in the rig count would fit in. Your high-spec, most desirable rigs would have left for the United States or other jurisdictions,” he said, with nearly all of those going to the U.S.

“We’d be looking at 30 or so high-spec rigs across the Western Canadian Sedimentary Basin were sent to the United States. The rationale for that is you’ve got a foreign exchange difference. You’re paid in U.S. dollars versus the Canadian dollar, so there’s a 30 per cent difference. Secondly, you can work year-round. You can literally work in the Permian or other parts of Texas 365 days a year, whereas in Canada, if you can get 120 days, you’re working for a fairly consistent producer and you’ve got a really good crew. It’s fairly rare that you would see that,” Scholz said.

Seasonal measures restrict us from drilling year-round in Canada. A lot of areas in Alberta simply can’t be worked in unless the roads are frozen.

Scholz went on, “The other attraction of the U.S. is rates are 30 to 40 per cent higher, on top of the foreign exchange considerations. So when you look at rig, sitting in Canada, a $15 to $20 million asset, you can have a better regulatory environment, (where it’s) easier to get approvals, the turnaround for getting a well approved to a drilling rig out is fractions of what they are here in Saskatchewan and Alberta – all these things play into a different business environment.”

Cannibalization

“The other reason is the marketability of the rig,” he said. “There were some rigs that are just not marketable or capable of drilling the wells we do today,” he said. Walking rigs or pad drilling are desirable. Those that can’t do that are less so.

“The majority of the rigs that have come off are just not marketable anymore,” he said.

“Because rates are so low, because the market has been hemorrhaging so much, it’s very difficult for a drilling rig or service rig company to put money back into servicing equipment. So you have a lot of cannibalization, we call it. One of your pumps goes down. Well, one of your rigs hasn’t been working for a while, let’s take the pump off that. You have an engine that goes down. Let’s take the engine off of that, put it on the rig that’s working. So you have all these different components salvaged off of rigs, and it gets to the point where, we’ve taken all the components off so we need to deregister that rig. But we’ve kept this other rig working a little bit longer before we’ve had to do some serious retrofits.”

Of the deregistered rigs that didn’t leave the country, Scholz estimated probably 70 per cent were not marketable, and 30 per cent cannibalized.

Smaller rigs not as attractive

“A lot of the rigs in our arsenal were not capable of a 7,000 metre well,” he said. “They just didn’t have the hook capacity.”

That’s an important factor in a rig’s marketability. Lower-spec rigs are not as marketable.

“The high-spec rig market is actually relatively tight right now,” he said, because there’s a good deal on their rates compared to several years ago. “It’s very compelling to take those out of the country.”

A “high spec rig” would be a triple derrick, AC-powered, 1,600 horsepower pumps, top drive and a walking system for pad drilling, with a joystick control.

“You have 515 rigs left on the drilling side. It’s a simple supply and demand equation. I think we have a little more runway. Maybe we get to 280 rigs (working). You’ve got 280 working in an elevated area of activity, of 515. I think there’s still more equipment that could be retired. I think, generally speaking, the basin can sustain 400 rigs. I think you could easily see another 100 rigs leave the inventory,” Scholz said.

“Back in 2006, we would have had around 950 rigs.”

Labour a restriction

“The biggest restriction I think for going anything beyond 300 rigs, or whatever we cap out at, is people. We’ve lost a significant amount of key talent that we’re going to have to grow again. I still think there’s going to be job opportunities in the industry. Will it be smaller? Yeah, for sure,” he said.

Some larger companies are advertising right now, looking for workers. “They could be looking for relief crews or getting an incremental rig out the door,” Scholz said. “What I’m hearing from some of my guys, at least on the drilling side, is they’re getting calls to book for the summer. That’s unusual. It’s been unusual in the past four or five years that has happened. So there are some positive signs that are happening that would indicate a further tightening on supply.”

Asked what the future of a kelly rig in Canada is, Scholz said, “It is a customer-driven preference. There are still some customers that swear by you don’t need all the bells and whistles to have an efficient operation. You can still get away with a lower-spec rig that has a really, really competent crew.

He said, “The majority would have a top drive, but it really boils down to customer preference.”

Kelly rigs are still working in southern Saskatchewan, he noted.

Desirable features

“We still do skid rigs on pad wells, but if there was anything a company had on their list of what we need to make it more marketable, it’s not a bad business to be in if you have a rig with a walking system doing batch drilling throughout the year,” he said. “A walking system would be one of the first things I would do.

“We’re always constantly hearing that operators are looking for greater pumping pressure, so 7,500 PSI. You’d have to have the mud pumps to go with that. 1,600 horsepower is going to help get to that pressure.”

Top drives are where most companies would be at, he said.

Automation like mechanized pipe handling is another desirable feature. But none of this comes cheap. Scholz said, “One of the things to keep in mind with all of this is that this all costs money, and this industry doesn’t have the money it used to for research and development.”

He expects to see more advancements in downhole tools and directional equipment.   

How fast can you drill?

Are we rapidly reaching the limit of how fast you can drill, given you can’t trip out and trip in any faster? “That’s a tough question to answer. Let’s put it this way. We’d be kidding ourselves to put caps to the limits of our innovation. I know it’s shocking that wells that used to be drilled in 45 days can now be drilled in seven. You ask anybody 10, 15, years ago, ‘Do you think we could get there?’

“And they’d say, ‘No, that’s impossible, the equipment would never hold up. You can’t trip that fast.’

“I would never put limitations and say it can’t happen,” Scholz said.

“You’re going to have a level of diminishing returns, trying to optimize existing technology, but I would say additional productivity can always come from deploying new technologies as opposed to optimizing existing ones. Maybe there’s a widget or a set of tools that will be introduced five years from now.”

More rigs than needed

“With the existing inventory in Canada, we still have more rigs then we need. You can throw in productivity increases as one of the other reasons why we see a gradual decrease of equipment,” Scholz said.

The CAODC now prefers using operating days as a metric as opposed to rig count. He explained its “how many days has the entire fleet generated, and then within each company, because that’s our billing metric. If we know how many days have been drilled, we know how many billable days we’ve had as an industry. Here we’ve had this nice popup of 260 rigs, but what does that mean on an annualized basis? Okay, we got up to 260, but how many days did the inventory actually accumulate?

“Even utilization, I find to be a bit of a misleading target, because the industry is in such a transition right now, and the fact I’ve already disclosed that I think that even at 515, right now, is too many to sustain in this market.

“Utilization talks a lot about spare capacity, whereas operating days gives us a much better barometer of how many days did we actually drill?”

Of those other 100 rigs, does Scholz expect them to ever work again, or to be cut up?

“It depends on the condition of the rig. It depends on if we’ve started to cannibalize that equipment. If it’s missing significant parts, you might not put capital into it,” he said.

How many new rigs have been built in Canada since the downturn? “I wouldn’t say 10. Probably under five,” he said.

As for the companies that built rigs, he said, “They went broke or they diversified outside of the country. That’s going to be the other challenge for our industry. You’re not making enough money to allocate maintenance capital. You’re not making enough for repair and maintenance, to allocate for future repairs. It means those rigs are eventually going to have to be put on the fence. When you have the lack of facility to make those repairs, and eventually build new equipment, it’s kind of looking at a bit of recipe for disaster if at some point we see even further anticipation of activity down the road,” he said.

The institutional capacity is getting smaller and smaller, he said.

For rigs that have been sitting for five plus years, will any of them work again?

“Never say never, but the margins are so poor in this industry, that it’s going to take much better days an a long runway of better profitability for our industry to justify putting in the needed capital to put those rigs back to work,” he concluded.

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