Spring breakup slowdown offers needed pause for hard hit drilling industry
Drilling will be reduced even more than usual: 31% decline forecast for average working rig count in Canada for the rest of 2020
CALGARY — It’s a “glass half-full” way of looking at a crisis but as plunging oil prices cast a shadow over oil and gas companies in Western Canada, the drilling industry is already slowing down because of the weather.
Each year in mid-March, melting snow and ice prompt local authorities to impose weight limits on roads to prevent damage caused by the movement of heavy equipment, such as drilling rigs, a season known as spring breakup.
Rig owners lay off operating staff and use the break, which varies from two or three weeks to two months or more, to maintain equipment and prepare for the summer drilling season.
“It’s not by design but it’s fortuitous. We’re right at the end of our first-quarter capital program,” Grant Fagerheim, CEO of Calgary-based producer Whitecap Resources Inc., said in an interview.
“We have spent between $160 million and $165 million – and we’ll have completed (quarterly) spending by March 23 as we’re coming into spring breakup.”
Oil prices were already falling because of fears the novel coronavirus would slow global energy demand when a price war erupted between major producers Saudi Arabia and Russia after they failed to agree on an extension to their output cuts.
Crude oil futures were trading for less than US$30 per barrel on March 16, down from more than US$50 at the end of February.
Fagerheim said spring breakup this year will provide a pause to allow the international chaos to settle down.
He said he has assured his 157 office workers in Calgary and 120 field staff their jobs are safe for this year.
But the rest of Whitecap’s $370-million 2020 capital budget stands to be reduced if oil prices are still low when breakup ends.
“If you’re a glass half-full kind of guy, that’s one way to be positive … It gives E&Ps (exploring and producing companies) a little more time to make an informed decision,” conceded oilfield services analyst Tim Monachello of AltaCorp Capital.
But he added spring drilling activity will be reduced even more than usual this year, pointing out AltaCorp is forecasting a 31 per cent decline in the average working rig count in Canada for the rest of 2020 even if the U.S. oil price rebounds to an average of US$41.50 per barrel.
“We’ll end Q1 probably better than many people anticipated, but I think the concern is, is this industry going to come to life again after breakup?” said CEO Mark Scholz of the Canadian Association of Oilwell Drilling Contractors.
“That’s going to be the big concern.”
He said there are certain to be layoffs as rigs are idled – the industry estimates each rig employs about 20 crew members and supports as many as 175 direct and indirect jobs.
In its 2020 forecast in November, the Canadian Association of Oilwell Drilling Contractors predicted 4,905 wells would be drilled in Canada this year, a slight increase over 2019 but less than half the 11,226 wells drilled in 2014.
Scholz said it’s impossible to know now how much that forecast will need to be revised but it will almost certainly be adjusted lower.