Estevan 鈥揑n mid-January 2010, there were 531 rigs working in Canada of 803, or 66.1 per cent utilization. In Oct. 2014, the Canadian Association of Oilwell Drilling Contractors (CAODC) listed 811 drilling rigs on its books. Now, as of Jan. 23, 2020, that fleet has contracted to 515, and hasn鈥檛 hit bottom yet. Rig utilization, of the much-reduced fleet, was just 52 per cent.
Over the last five years, Canada鈥檚 oil production has grown from just under 4 million barrels per day to just under 4.5 million bpd. Saskatchewan鈥檚 production has remained relatively flat, close to 500,000 bpd. Thus, Canada is producing more oil with dramatically fewer rigs compared to five years ago.
(Note: currently oilsands production is 53 per cent in situ, which requires drilling, while mining, 47 per cent, does not.)
Pipeline Newsspoke to CAODC president and CEO Mark Scholz in Estevan on Jan. 16 about this dramatic contraction in the drilling fleet, and what it means.
鈥淭here鈥檚 been material change in how the business is supplied. The good news is we have 260 rigs working across Western Canada,鈥� he said.
He noted that鈥檚 an improvement. Last year, that number was 230 for mid-January. In 2018, it was 348.
Where did the 300 rigs go?
鈥淭here鈥檚 a number of buckets the decline in the rig count would fit in. Your high-spec, most desirable rigs would have left for the United States or other jurisdictions,鈥� he said, with nearly all of those going to the U.S.
鈥淲e鈥檇 be looking at 30 or so high-spec rigs across the Western Canadian Sedimentary Basin were sent to the United States. The rationale for that is you鈥檝e got a foreign exchange difference. You鈥檙e paid in U.S. dollars versus the Canadian dollar, so there鈥檚 a 30 per cent difference. Secondly, you can work year-round. You can literally work in the Permian or other parts of Texas 365 days a year, whereas in Canada, if you can get 120 days, you鈥檙e working for a fairly consistent producer and you鈥檝e got a really good crew. It鈥檚 fairly rare that you would see that,鈥� Scholz said.
Seasonal measures restrict us from drilling year-round in Canada. A lot of areas in Alberta simply can鈥檛 be worked in unless the roads are frozen.
Scholz went on, 鈥淭he other attraction of the U.S. is rates are 30 to 40 per cent higher, on top of the foreign exchange considerations. So when you look at rig, sitting in Canada, a $15 to $20 million asset, you can have a better regulatory environment, (where it鈥檚) easier to get approvals, the turnaround for getting a well approved to a drilling rig out is fractions of what they are here in Saskatchewan and Alberta 鈥� all these things play into a different business environment.鈥�
Cannibalization
鈥淭he other reason is the marketability of the rig,鈥� he said. 鈥淭here were some rigs that are just not marketable or capable of drilling the wells we do today,鈥� he said. Walking rigs or pad drilling are desirable. Those that can鈥檛 do that are less so.
鈥淭he majority of the rigs that have come off are just not marketable anymore,鈥� he said.
鈥淏ecause rates are so low, because the market has been hemorrhaging so much, it鈥檚 very difficult for a drilling rig or service rig company to put money back into servicing equipment. So you have a lot of cannibalization, we call it. One of your pumps goes down. Well, one of your rigs hasn鈥檛 been working for a while, let鈥檚 take the pump off that. You have an engine that goes down. Let鈥檚 take the engine off of that, put it on the rig that鈥檚 working. So you have all these different components salvaged off of rigs, and it gets to the point where, we鈥檝e taken all the components off so we need to deregister that rig. But we鈥檝e kept this other rig working a little bit longer before we鈥檝e had to do some serious retrofits.鈥�
Of the deregistered rigs that didn鈥檛 leave the country, Scholz estimated probably 70 per cent were not marketable, and 30 per cent cannibalized.
Smaller rigs not as attractive
鈥淎 lot of the rigs in our arsenal were not capable of a 7,000 metre well,鈥� he said. 鈥淭hey just didn鈥檛 have the hook capacity.鈥�
That鈥檚 an important factor in a rig鈥檚 marketability. Lower-spec rigs are not as marketable.
鈥淭he high-spec rig market is actually relatively tight right now,鈥� he said, because there鈥檚 a good deal on their rates compared to several years ago. 鈥淚t鈥檚 very compelling to take those out of the country.鈥�
A 鈥渉igh spec rig鈥� would be a triple derrick, AC-powered, 1,600 horsepower pumps, top drive and a walking system for pad drilling, with a joystick control.
鈥淵ou have 515 rigs left on the drilling side. It鈥檚 a simple supply and demand equation. I think we have a little more runway. Maybe we get to 280 rigs (working). You鈥檝e got 280 working in an elevated area of activity, of 515. I think there鈥檚 still more equipment that could be retired. I think, generally speaking, the basin can sustain 400 rigs. I think you could easily see another 100 rigs leave the inventory,鈥� Scholz said.
鈥淏ack in 2006, we would have had around 950 rigs.鈥�
Labour a restriction
鈥淭he biggest restriction I think for going anything beyond 300 rigs, or whatever we cap out at, is people. We鈥檝e lost a significant amount of key talent that we鈥檙e going to have to grow again. I still think there鈥檚 going to be job opportunities in the industry. Will it be smaller? Yeah, for sure,鈥� he said.
Some larger companies are advertising right now, looking for workers. 鈥淭hey could be looking for relief crews or getting an incremental rig out the door,鈥� Scholz said. 鈥淲hat I鈥檓 hearing from some of my guys, at least on the drilling side, is they鈥檙e getting calls to book for the summer. That鈥檚 unusual. It鈥檚 been unusual in the past four or five years that has happened. So there are some positive signs that are happening that would indicate a further tightening on supply.鈥�
Asked what the future of a kelly rig in Canada is, Scholz said, 鈥淚t is a customer-driven preference. There are still some customers that swear by you don鈥檛 need all the bells and whistles to have an efficient operation. You can still get away with a lower-spec rig that has a really, really competent crew.
He said, 鈥淭he majority would have a top drive, but it really boils down to customer preference.鈥�
Kelly rigs are still working in southern Saskatchewan, he noted.
Desirable features
鈥淲e still do skid rigs on pad wells, but if there was anything a company had on their list of what we need to make it more marketable, it鈥檚 not a bad business to be in if you have a rig with a walking system doing batch drilling throughout the year,鈥� he said. 鈥淎 walking system would be one of the first things I would do.
鈥淲e鈥檙e always constantly hearing that operators are looking for greater pumping pressure, so 7,500 PSI. You鈥檇 have to have the mud pumps to go with that. 1,600 horsepower is going to help get to that pressure.鈥�
Top drives are where most companies would be at, he said.
Automation like mechanized pipe handling is another desirable feature. But none of this comes cheap. Scholz said, 鈥淥ne of the things to keep in mind with all of this is that this all costs money, and this industry doesn鈥檛 have the money it used to for research and development.鈥�
He expects to see more advancements in downhole tools and directional equipment. 聽聽
How fast can you drill?
Are we rapidly reaching the limit of how fast you can drill, given you can鈥檛 trip out and trip in any faster? 鈥淭hat鈥檚 a tough question to answer. Let鈥檚 put it this way. We鈥檇 be kidding ourselves to put caps to the limits of our innovation. I know it鈥檚 shocking that wells that used to be drilled in 45 days can now be drilled in seven. You ask anybody 10, 15, years ago, 鈥楧o you think we could get there?鈥�
鈥淎nd they鈥檇 say, 鈥楴o, that鈥檚 impossible, the equipment would never hold up. You can鈥檛 trip that fast.鈥�
鈥淚 would never put limitations and say it can鈥檛 happen,鈥� Scholz said.
鈥淵ou鈥檙e going to have a level of diminishing returns, trying to optimize existing technology, but I would say additional productivity can always come from deploying new technologies as opposed to optimizing existing ones. Maybe there鈥檚 a widget or a set of tools that will be introduced five years from now.鈥�
More rigs than needed
鈥淲ith the existing inventory in Canada, we still have more rigs then we need. You can throw in productivity increases as one of the other reasons why we see a gradual decrease of equipment,鈥� Scholz said.
The CAODC now prefers using operating days as a metric as opposed to rig count. He explained its 鈥渉ow many days has the entire fleet generated, and then within each company, because that鈥檚 our billing metric. If we know how many days have been drilled, we know how many billable days we鈥檝e had as an industry. Here we鈥檝e had this nice popup of 260 rigs, but what does that mean on an annualized basis? Okay, we got up to 260, but how many days did the inventory actually accumulate?
鈥淓ven utilization, I find to be a bit of a misleading target, because the industry is in such a transition right now, and the fact I鈥檝e already disclosed that I think that even at 515, right now, is too many to sustain in this market.
鈥淯tilization talks a lot about spare capacity, whereas operating days gives us a much better barometer of how many days did we actually drill?鈥�
Of those other 100 rigs, does Scholz expect them to ever work again, or to be cut up?
鈥淚t depends on the condition of the rig. It depends on if we鈥檝e started to cannibalize that equipment. If it鈥檚 missing significant parts, you might not put capital into it,鈥� he said.
How many new rigs have been built in Canada since the downturn? 鈥淚 wouldn鈥檛 say 10. Probably under five,鈥� he said.
As for the companies that built rigs, he said, 鈥淭hey went broke or they diversified outside of the country. That鈥檚 going to be the other challenge for our industry. You鈥檙e not making enough money to allocate maintenance capital. You鈥檙e not making enough for repair and maintenance, to allocate for future repairs. It means those rigs are eventually going to have to be put on the fence. When you have the lack of facility to make those repairs, and eventually build new equipment, it鈥檚 kind of looking at a bit of recipe for disaster if at some point we see even further anticipation of activity down the road,鈥� he said.
The institutional capacity is getting smaller and smaller, he said.
For rigs that have been sitting for five plus years, will any of them work again?
鈥淣ever say never, but the margins are so poor in this industry, that it鈥檚 going to take much better days an a long runway of better profitability for our industry to justify putting in the needed capital to put those rigs back to work,鈥� he concluded.
