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Chill in the air for Canadian drillers

Labour day heralded the unofficial start of the Canadian drilling season. This year it’s beginning amid uncertainty

There's no shortage of causes for concern as producers grapple with the double uncertainty of oil and natural gas prices. Add in continued political and regulatory uncertainty over US relations, cancelled liquefied natural gas projects on the west coast and the Trans Mountain pipeline delay, and it all makes for a depressing scenario heading into the usually frenetic season.

Unlike the US, drilling in Canada is overwhelmingly tied to the fall and winter months when the ground freezes hard enough to support trucks and equipment. In fact, many of the country's unconventional basins, such as the prolific Montney fields of northeastern British Columbia, are winter-access only due to lack of paved roads and other critical infrastructure.

Thus, non-oil sands onshore production is dependent on the number of wells that can be punched in a roughly six-month window extending until spring when the ground thaws and starts the cycle anew. The summer days are typically spent arranging financing and setting capital budgets for the winter campaign.

Well tally down

According to Statistics Canada, an agency of the federal government, oil and gas spending is projected to fall 12% in 2018, to C$33.2bn ($25.18bn), including C$10.2bn of oil-sands spending. Canadian capex levels have dropped by half since 2015, which translates into declining oilfield activity.

In late July, the Petroleum Services Association of Canada (Psac), which represents all services companies not directly involved in drilling-such as well testers, pressure pumpers and geophysical firms-reduced its projected 2018 well tally by 7% to 6,900 from a previous downward revision of 7,900 in April. By way of comparison, oil companies bored more than 25,000 holes in the peak year of 2008. It would mark the fifth straight year of declines.

Psac based its updated forecast on average natural gas prices of C$1.55/m ($1.8) British thermal units, US$65-a-barrel crude and the Canada-US exchange rate averaging $0.77 to the Loonie (Canadian dollar).

Rig use declines

But apart from commodity price issues, reasons for the drop are also related to changing technology. Well lengths are longer, the number of frack stages per well—probably a more reliable indicator of well performance—are increasing and the number of days it takes to drill a well is falling. These are all positive for producers. Simply put, there's no longer a need for 25,000 wells a year to sustain or even moderately increase production.

Still, ever increasing numbers of rigs and crews are sitting idle. The Canadian Association of Oilwell Drilling Contractors (Caodc) is predicting 6,138 wells in 2018 (the discrepancy from the Psac numbers is due to the way they are calculated). More telling are the anticipated rig utilisation numbers. The Caodc is expecting a meagre 37% of the 615-rig fleet will be working in the busy fourth quarter. That's well up from 18% in the second quarter, but down from 43% last year.

And the number of rigs is falling, too. According to Caodc data, 613 registered rigs were working in Canada for the week ending 1 September. That's down from a fleet of over 850 in 2010.

Where are those rigs going? Across the 49th Parallel to the US. The drilling season in the southern Permian basins runs all year long and the demand for Canadian iron is steady as Canada's southern neighbour grapples with 1m barrels a day.

According to Psac president Tom Whalen: "As we've said on previous occasions, this is not sustainable from a business continuity and competitiveness perspective. It's also a compounding symptom of the sector's lack of attractiveness for investment."

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