Kathryn Lundy
Canadian Association of Oilwell Drilling Contractors
Calgary
The Canadian oil and gas industry has been in a mode of restructuring since the late 1980s as it became increasingly apparent that the natural gas "boom" which was to replace activity previously generated by high oil prices was not going to materialize.
The production companies operating in Canada are concentrating on rationalization of land holdings and corporate downsizing and realignment rather than exploration and development of petroleum resources.
Not surprisingly, this has resulted in a substantial downturn in the demand for the services of the contract drilling and well servicing sectors in both western Canada, where the majority (95%) of the industry activity takes place, and in the frontier and East Coast offshore arenas.
Table 1 shows utilization of the Canadian land based drilling rig fleet since 1985.
The persistently low levels of utilization throughout this period and prior to the Organization of Petroleum Exporting Countries price shocks in the '70s illustrate that the high levels
THE INDUSTRY
The contract drilling sector presently offers the services of 432 rigs under 41 corporate flags.
Until 1990, the fleet was predominantly privately owned. In 1986, just prior to the oil price crash, there were 80 land based contractors, run by 73 companies, operating 569 rigs. The publicly owned companies ran 220 rigs, or 39% of the fleet.
The rationalization which has occurred in the sector, especially since 1990, has led to substantial public ownership, with 63% of the fleet operated by publicly traded contractors. These companies are relatively large, operating an average of 20 rigs each.
The remaining 33% of the fleet is operated under the auspices of privately owned companies, with an average of five rigs apiece.
On the well servicing side, there are about 600 rigs owned by 80 contractors in Canada.
Activity has not fluctuated downward on the same scale as drilling activity, primarily because that sector's activity is generated by completions as well as workovers to maintain production levels.
Importantly, there was a significant increase in well abandonments during 1991 as operators moved to mitigate against environmental liability in the course of rationalizing land holdings.
While lower levels of drilling since 1985 will impact future servicing work, some additional offset has also resulted from efforts to rework suspended wells, often using horizontal techniques.
This sector remains characterized by private ownership 'and it is not likely that the owner/operator status of the industry will be altered to the extent it has occurred on the drilling side.
FORECAST
In spite of the downsizing which has occurred to date in the drilling rig fleet-about one quarter of the equipment has been eliminated from the market since 1986-further rationalization is required.
This is shown from the forecast demand for drilling rigs in 1992 (Table 2).
This forecast is based on investment of $1.6 billion, for an estimated 4,100 wells to be drilled during the year. There is a recent trend away from drilling up gas reserves, to renewing both exploration and development activity in oil prone areas.
The number of wells drilled in western Canada is expected to average 4,000-5,000 until the mid-'90s as demand for crude oil and natural gas will not likely increase at rates that will cause real price increases until that time.
This contrasts sharply with the yearly average of 7,770 wells drilled through the 1980s, despite rather sharp decreases in prices during the latter half of the decade. This will continue to force both drilling and service rigs, and perhaps contractors, out of the market until supply and demand reach a more stable equilibrium.
As capital markets have become globalized, many producing companies are looking to invest in areas without the regulatory and tax burden that exists in Canada. Return on capital employed in the petroleum industry in Canada has averaged only 5% over the decade, although there are some very profitable juniors and medium size producers.
THE REGULATORY VIEW
It is not dear that Canadian regulators understand that the oil and gas industry simply cannot afford to operate in a mature basin under an economic regime characterized by high, provincially dictated royalty rates in combination with rising finding costs, the latter of which are in part due to the extensive administrative requirements and licensing costs.
The failure of the Alberta government's attempt to raise activity levels through a crude oil royalty "holiday" program introduced in November 1991 illustrates that long term solutions are required to allow for a return to reasonable rates of return on investment.
On the positive side, the Canadian contracting sector has embraced sophisticated technical innovations, such as horizontal drilling, automatic pipe handling, and top drives, while utilizing new materials such as tungsten carbon PDC in bits, to reduce the time and cost of drilling.
The innovations have partially offset the increasing regulatory costs faced by operators and have provided Canadian contractors with an expertise second to none in the world.
As international markets for petroleum services increase in attraction and previously closed markets such as Argentina, Mexico, Eastern Europe, China, and the former U.S. S. R. become accessible, suppliers of Canadian contracting services and equipment will be very well placed to take advantage of privatization initiatives.
