In November news, the Canadian Association of Oilwell Drilling Contractors (CAODC) released a negative forecast for 2016 that promises a prolonged downturn in the drilling sector. CAODC projects that only 4,728 wells will be drilled in 2016, which represents a decrease of 58 per cent from 2014. Many rig companies have already downsized to less than one half of their 2014 levels and consolidations have begun. The drilling industry expects to lose 28,485 jobs compared to 2014, a decline of 57 per cent.
CAODC president, Mark Scholz, was quoted as saying “The oil and gas services industry is facing one of the most difficult economic times in a generation.” One of the worst periods in the industry’s history was 1983 and rig counts in Western Canada during 2016 are expected to drop to that level.
Besides the decline in demand for drilling rigs, there is a triple whammy facing the drilling companies. Corporate taxes have already been hiked in Alberta. There are possible royalty hikes on the horizon as the new NDP government in Alberta reviews the current royalty regime. And, finally, who knows for sure what the final impact will be of proposed environmental standards. One thing that is for sure is that only the most resilient companies are likely to survive. How long that will take is anyone’s guess at the moment.
As service companies adjust their cost structure to match the new reality of low oil prices, this will reduce the costs to their customers, which will hopefully make more projects economically feasible. An article in the Calgary Herald on December 17, 2015 suggested that costs have already dropped 9 per cent, with more in store for 2016. This will be a critical factor moving forward as costs in the Western Canadian Sedimentary Basin and the oil sands are generally higher than for the shale formations found in the United States, which makes them our most immediate competitor as we struggle out of this recession.
Despite the continuing bad news, the best advice is not to panic and ride out the storm. It will take some creativity to re-position business strategies but Western Canada has done this many times before.
Reduce your costs with the effective management of your oilfield service business in order to maintain your operations.