With oil prices now at US$94 per barrel, why is industry activity akin to when it was half that?
By Brian Zinchuk
Oil prices are now US$94 a barrel, and yet oil industry activity levels in Saskatchewan are more like when it was US$40 a barrel. A lot of people in the industry I’ve spoken to in recent days are wondering just what the hell is going on, or more specifically, why it is not going on.
In the last week I’ve spoke to some of the most knowledgeable people I know in the Saskatchewan oilpatch, business owners all, from Weyburn, Lloydminster and several from Estevan. There’s a rising chorus of dissatisfaction amongst them. Things should be booming in this province’s oilpatch, but they aren’t. And this disquiet could threaten the governing Saskatchewan Party with the potential loss of a key portion of its base.
Pumpjacks near a battery southwest of Torquay, Saskatchewan. Photo by Brian Zinchuk
The level of dissatisfaction they are showing is extraordinary. These are people you would expect to be writing big cheques to support the party in power. Instead, one helped found an upstart new party. Another cc’d me on an email sent to the premier. One of the points was the recent rejection of a donation of $2 million for an MRI in Estevan (from a family which made its money in the oil business). He also pointed out regulatory overreach into, of all things, “new policies mandated are anti-bullying, anti-violence, and anti-harassment in the workplace.”
Drilling is key, and it’s simply not happening
The most important indicator is drilling rig activity, and relative to the price of oil, it’s in the dumps, with only 31 rigs working. Only 28 were drilling for oil.
As of Sept. 27, there were 14 rigs drilling in southeast Saskatchewan, but one of those was drilling for potash near Lajord, so it doesn’t really count. There were three rigs drilling in southwest Saskatchewan, but two of those were drilling for helium, leaving just one punching holes for oil. For a very long time, there were four rigs working in that area, then two, now one drilling for oil. And one rig, which spent most of its career in the southwest, recently showed up in southeast Saskatchewan.
West central Saskatchewan had seven rigs working, about half of the usual number for this time of year as companies have shut down their drilling programs for the year, three months early.
The one bright spot, if you could call it that, was the seven rigs working in northwest Saskatchewan. But that, too, is a shadow of the numbers of just a few years ago, even during the downturn.
But what is really alarming to me is that it’s the end of September, and several companies in both west central and southeast Saskatchewan are shutting down their drilling programs until the new year. Why? The weather has been pretty much perfect for drilling, with good temperatures and dry conditions. When oil prices are at a level we were dreaming of all during the seven year downturn, why are rigs shutting down? And more importantly, why are they shutting down in Saskatchewan?
One of those people I spoke to likes to say that, all things being equal, when it comes to oil, Alberta’s got better rocks. So Saskatchewan has to compete on its regulatory regime, making it easier to do business here. But that’s not what I’m hearing, and it’s not what I’ve been hearing for a long time, and from more and more people.
They feel they are being drowned in paperwork from ever-increasing regulatory burden. The above example of the need for an “anti-bullying” policy is a perfect example of regulatory overreach gone mad. You want an “anti-bullying policy?” Don’t be a jerk. There’s your policy. Now can we get back to business?
I was told Saskatchewan used to be a place where five guys could launch an oil company for $5 million, and build it to 500 barrels per day. Those numbers have gotten higher and higher to the point that is exceptionally rare to see anyone trying to launch a junior oil company in this province these days. The fact that I’ve spoken to two small junior producers in the past week is a rare oddity, because they hardly exist anymore. You’re more likely to find a moose walking across a road in southeast Saskatchewan than a run into an oil executive, these days.
Crescent Point, the largest driver of oil activity for the last 15 or so years, has largely lost interest in this province. Don’t be surprised to see them announce a sale of their remaining assets. I’ve started a pool, and so far, not one person has told me they don’t expect it’s going to happen.
To compound all of this, there seems to be the start of yet another technological revolution occurring in drilling in southeast Saskatchewan. There are now three companies who have adopted a new technique for drilling and completing wells. The idea is to drill not one or two horizontal legs to a well, but eight, or more. Instead of running frac ports or even casing to the toe of the well, and cementing them in, it’s all open hole now. And since it takes about three days to drill a leg, some of these wells are ending up taking 28 days, compared to six for a more typical southeast Saskatchewan well.
That’s good for the oil producer, because costs are brought down substantially. But its bad for the services, because while that one rig might be working, it’s moving one-fourth as many times, meaning substantially less work for the rig movers. Open hole means much less casing and cement, meaning much less work and product for power tongs companies, the trucking companies moving pipe, pipe sales, and cementers. And it also means lease building is reduced by a similar factor – about 75 per cent, since you only need one lease per month for those rigs working 28 day holes. The lucky few rigs drilling these are getting steady work, but there are much fewer rigs working overall.
Even bit salesmen don’t have nearly as much to do. I spoke to geologist working in northern Alberta who said they’re getting 20 legs drilled out of one bit!
And hardly anyone is fracking anymore. Whereas the sky used to be lit with the light towers of 40-man frac crews, it’s rare to see a frac crew at all anymore. I drove past one near Torquay the other day, and came to the realization I couldn’t remember the last time I had seen a frac crew prior to that.
In Saskatchewan, the oilpatch is not the corporate headquarters jobs. It’s not the oil companies. It’s the oilfield service companies which work for those oil companies that are providing the jobs and local employment. And those service companies are doing less and less for all the above reasons.
There’s definite angst there, among those oilfield service business owners I spoke to. And while much blame is rightly placed on Justin Trudeau’s federal government, it was also pointed out to me by one, who is also an oil company executive, that they hardly deal with the feds at all. Their interaction is with the provincial government. And he questioned if the Ministry of Energy and Resources is really trying to promote the industry or regulate it to death. He even told me he thought the best energy minister Saskatchewan ever had was Eric Cline, who was the NDP minister of Industry and Resources from 2003-2007, the ministry previously known as Economic and Cooperative Development and as Energy and Mines. That’s saying something, coming from someone who you would expect would be an ardent supporter of the Saskatchewan Party. And it’s also pretty strong words on what he thought of the Saskatchewan Party’s record on oil and gas.
Another person I spoke to is now actively trying to unseat the Saskatchewan Party, saying they are acting more like Liberals than small “c” conservatives, allowing a more woke agenda in classrooms and less Christianity.
That’s outside the energy argument, but the thrust is the same – many people whom you would expect would be the natural supporters of the Saskatchewan Party government are becoming disillusioned with how the bureaucracy is bringing in regulations they are increasingly uncomfortable with. “Their own energy (ministry) has bought into what the feds have said. And now our guys in Kindersley can’t vent any gas at all in production. What do you think that does to those guys?” he pointed out.
Pretty much every government says they will reduce red tape. But 16 years in, this government must realize any red tape in place now, they own.
And underlying all of this is the open question of geology: Are our oilfields now in a decline? Despite the government’s plans to increase oil production by a third, from around 450,000 barrels per day to 600,000 barrels per day by 2030, we’re not seeing any concrete action to make that happen. And as I like to point out whenever I write about all this Net Zero stuff, 2030 is only six years, three months and two days away.