The Magical Mystery Tour of oil over US$50

Are we about to embark on the Magical Mystery Tour?

As a Beatles song, it kinda sucked. But for the oilpatch, crossing the threshold of US$50 for a barrel of West Texas Intermediate oil, and staying there, is an important threshold.

In recent months I’ve heard time and again, from drilling contractors to oil company CEOs, that US$50 is something of a magic number. We ‘ve been floating right at that number since mid-September, and, at the time of writing on Sept. 25, it was still US$51.66, spiking that day due to concerns over Kurdish independence moves in Iraq.

Can it stay there? If it does, will our Magical Mystery Tour of making a little more money, and activity picking up, begin?

Will we see the drilling rig count in Saskatchewan go up 50 per cent or, hopefully, more? Will drilling contractors, who have been limping by with one out of three or four rigs working, get to send out another rig? Dare they dream of sending out a third?

That might be tough, as I’ve heard that some companies have had to cannibalize their fleets to keep the active rigs running. It also might be hard to come up with the people to man them.

When drilling activity picked up in the first quarter of this year, it became apparent that the service rigs’ workforce was poached. Since then, nearly every service rig company office I drive by has a billboard looking for workers.

As a result of the shortage in drilling hands, their wages went up. But the drilling companies didn’t see a corresponding increase in their day rates, so the drillers basically took that payroll increase on the chin, or so I’ve been told.

For pretty much all of 2017, I’ve been pointing out how the rates most oilfield services companies are just enough to keep the lights on, but not enough to do much else. Will we see those rates creep up this fall?

I’m betting no. I don’t think we’ll see increases until the calendar says 2018.

So far, oil has only been above US$50 for a few days. Most people have told me those prices have got to be a little higher than that, like closer to US$55, for a few months, to really see an increase in activity. Let’s see here: September, October, November…. Yup! Rates are going to be flat until 2018.

If there is more money in the system, and oilfield service companies are making more, and hiring more, we could see a labour shortage hit in the first quarter of 2018. The winter drilling season is by far the busiest, from about Jan. 4 to March 15. In northern Alberta, they call it the 100 days of hell, but with our spring breakup being a lot sooner, it’s closer to 70 days.

For most of February 2017, we had over 60 drilling rigs working, or 50 per cent more than today. A brief drop in the rig count to 49 was followed by a spike to 76 on March 1, when oil was around US$54 for WTI. Indeed, that busy winter season in Q1 of 2017 corresponded with oil floating between US$52 and US$54 per barrel. If we get to that level this fall, and stay there through March 15, this could be the busiest drilling period we’ve seen in three years.

There are a lot of people who would love to see that again.

For the last year, I’ve had people tell me they’ve spoken to people who have left the oilpatch, never intending to return again. “And they’re not coming back,” is usually how the sentence ended.

So the big question will be this: will they come back?

Will people who have forsaken the oilpatch come back for four or three or two months of work, then expect a layoff in March? Will they leave whatever job they have now, which likely pays a lot less, but probably has a stable paycheque?

The expectation from many of those who may be doing the hiring is, “No.”

We shall soon see.

 

Brian Zinchuk is editor of Pipeline News. He can be reached at brian.zinchuk@sasktel.net.

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