Oilfield service companies are hoping a boost from liquefied natural gas projects will lift the industry in 2014 after oil and gas producers spent much of the past two years hunkering down in an environment of low commodity prices.
“We haven’t had a price increase in our service for a long time,” said Garnet Amundson, president and chief executive officer at Essential Energy Services Ltd., which has drilling operations across Western Canada. “There are 1,100 service rigs, and only about half of them are working on a regular basis, that means there is a lot of idle equipment sitting there.”
Rig-utilization rate — a core measure of oilfield services industry activity — has hovered at the lower end of the five-year levels, suggesting lacklustre growth.
A wet and prolonged spring breakup further dampened sentiment, but rig count was up 13% in August compared with the same period last year, pointing to some sort of a pick-up.
“Drilling companies were generally encouraged about activity levels into year-end and the setup into 2014,” Barclays Capital said in a note to clients, after speaking to a number of Canadian oil field services companies.
LNG is the “big elephant” that everybody is eyeing, according to Jason Sawatzky, institutional director of oilfields services at AltaCorp Capital Inc., which covers 30 oil field players.
“If you look worldwide, there is really no other oilfields service market that has [growth] in front of it like Canada does — LNG developments,” the Calgary-based analyst said.
Three LNG projects on the West Coast have secured export permits while another three have applied for licences. The oilfield services industry is expecting a mouth-watering capital spend of about $30-billion if three of the proposed projects eventually go ahead.
“That type of activity is already happening and you will see that ramping up in 2014,” Mr. Sawatzky said. “The companies within oilfield service that would be on the frontlines are deep drillers such as Precision Drilling Corp. and Trinidad Drilling Ltd. that have deep rigs that will be working on delineation drilling.”
RBC Dominion Securities analyst Dan MacDonald expects 2014 to show increasing demand for deep rigs, “including contracted new build announcements, which should serve as a good indicator of future activity.”
LNG projects are potentially lucrative, but oilfield service companies are signaling caution as natural gas exports are a few years away and subject to final investment decisions and regulatory hurdles before they finally get under way.
For now, natural gas production is in decline and services firms are not expecting producers to pour additional capital in the sector.
“Oil differentials are no longer the primary concern today now that Canadian natural gas prices (AECO) are trading at more than $1 per million cubic feet discount to Henry Hub pricing,” Barclays said.
“Winter should provide some relief, though Canadian gas remains fundamentally challenged to compete with growing U.S. production, particularly in the Northeast.”
While differentials between Western Canadian Select and North American benchmark West Texas Intermediate have narrowed over the past few months, the oil sector is reluctant to commit to capital spending.
“Long-term preparations are progressing in the oil sands, but in terms of moving into production, people are still pausing and assessing project economics,” Mr. Amundson said.
Investment bank Peters & Co. Ltd. says while oil companies have seen their cash flows improve this year, it has not translated into greater drilling activity.
“In our view, this is a function of limited access to capital, for intermediate and junior producers, cautiousness from producers regarding the sustainability of improved commodity pricing, and larger producers being slow to react and having longer planning cycles.”
While new projects are pushed forward, oilfield services are finding new growth from old wells.
As volumes of drilling waste and completion fluids rise in the mature Western Canada plays, Secure Energy Services Inc. is helping customers find environment-friendly solutions to dispose off the waste.
Secure currently has cornered 13% of the Western Canadian Sedimentary Basin treatment and disposal market and sees that as a primary growth area as companies look at eco-friendly and cost-effective ways to manage water use.
Newalta Corp., another company focused on waste management, reported a 15% rise in second quarter revenues processing mature fine tailings.
“It has been a fantastic growth sector,” said Mr. Sawatzky. “If you look at Secure and Newalta, both companies have done very well over the past number of years. Looking forward, we expect the Oilfield Waste market in Western Canada to continue to grow due to three main factors: 1) a steadily increasing well count in Western Canada combined with the proliferation of horizontal drilling; 2) older producing wells are generating increasing amounts of waste; and 3) a shift to an oil-focused basin from a gas-focused basin is creating increased waste volumes.”
Maintenance work is also helping oilfield and ancillary companies at a time when new projects are being pushed forward.
Oilfield companies are also recalibrating to meet rising demand for horizontal drilling. Vertical and directional drilling accounted for 82% of drilling activity as recently 2008, but that has flipped in horizontal drilling’s favour as it accounted for 65% of all drilling in Canada last year.
“It has been a huge change over the past couple of years, as it has meant increased service intensity. That means drillers are on the site longer, need more rental products and servicing longer because these are such big wells,” Mr. Sawatzky said. “It has translated into higher utilization for a number of different services.”
New resource plays will also keep the oilfield services busy. Montney and Horn River — the primary sources for LNG exports — along with Duvernay and Wilrich are expected to see robust activity. Peters & Co. estimates the four plays will see drilling activity soar to 160 rigs by 2014, from 95 in 2012.
“We believe momentum will continue to build in high service intensity resource plays such as the Deep Basin, Duvernay and Montney, with accelerating foreign investment and joint venture activity figuring prominently.”