U.S. Permian Activity Driving Growth for Canadian Companies
For Canadian service and technology exporters, the U.S. oilfield services market represents the best near- and mid-term opportunities, industry insiders say. The benefits of working south of the border include the size of the market, the ease of operating there and the proximity of major U.S. resource plays to Canadian operations.
Consider the size of the market – 10 times greater than in Canada. Oil production also is about three times larger – which means a higher ratio of activity, even during Canada’s busy winter drilling season. Add getting paid in the stronger U.S. currency and the draw south gets even more attractive.
Activity has been ramping up in the US since the price of oil started gaining strength last year. Crude production in the U.S. will average 9.21 million barrels per day (b/d) this year, up from an average of 8.6 million b/d in 2016. And production is expected to increase to an estimated average of 9.73 million b/d next year, according to the U.S. Energy Information Administration’s (EIA) March 7, 2017 short-term energy outlook.
The 13 per cent increase in U.S. production this year is driven by gains in tight oil-producing states Texas, North Dakota, Oklahoma and New Mexico, the agency said. Texas and North Dakota will continue to be the largest producers of crude oil due to the prolific and economically recoverable resources in the Permian, Eagle Ford and Bakken plays, the EIA noted.
With the combination of the Permian’s continued growth and renewed production in the Eagle Ford, Texas is expected to continue to be the largest-producing state through 2018.
In 2016, Permian production averaged 2.0 million b/d, a five per cent increase from the level in 2015. EIA expects this trend to continue, with Permian production projected to average 2.3 million b/d in 2017 and 2.5 million b/d in 2018.
Canadian Oilfield Services Companies Headed South
A number of Canadian OFS companies have taken heed of the production trend, announcing in January and February a renewed focus in the U.S.
Trinidad Drilling Ltd. expects the Permian Basin will continue to be the strongest area of demand, with 75 per cent of the active U.S. fleet operating in this basin. Of the Trinidad’s active fleet, close to 30 per cent of the rigs were working in the Permian at the start of 2017 — its primary area of activity.
In light of improving industry conditions and activity levels, Savanna Energy Services Corp. said earlier in January that it had budgeted to reactivate three drilling rigs in the Permian, incremental to seven rigs recently reactivated there.
Aveda Transportation and Energy Services Inc. announced in mid-January that the company will soon conduct a roadshow to provide investors with an understanding of the company’s growth potential, particularly in the Permian, arising from increased drilling activity.
And Red-Deer-based Predator Drilling Inc. said in February that it has recently expanded operations into the basin. Predator will operate its Texas business through its new subsidiary company, Predator Drilling LLC, based out of Midland, Texas. The company recently completed its first well for a top tier producer and is providing integrated pre-set drilling services.
Current U.S. Activity Levels Point Towards Increased Service Demands
The higher price for crude oil futures stoked a revival in U.S. shale oil drilling as oil headed above US$50 a barrel since OPEC and its partners started trimming supply on Jan. 1.
American oil drillers boosted the rig count to just over 750 by mid-March, the highest number since October 2015, according to Baker Hughes Inc. Canadian drilling activity has jumped as well, reaching around 315 active rigs in mid-March, about a third higher than a year ago.
Meanwhile, analysts at U.S. financial services firm Cowen & Co. said in February capital expenditure tracking showed 31 U.S. producers planned to increase spending by an average of 36 per cent in 2017 over 2016. That expected spending increase in 2017 follows an estimated 45 per cent decline in 2016 and a 37 per cent decline in 2015, according to Cowen’s estimates of the 65 E&P companies it tracks.
Strong Activity Luring Canadian OFS Companies Back After Downturn
While Canadian oilfield services (OFS) companies have long had a presence in the U.S. that presence has grown over the last decade as the unconventional resources boom has taken root. Canadian drilling contractors and well servicing operators saw significant growth in the American market leading up to the commodity crash in 2014.
During the downturn, however, many companies downsized or suspended operations in the U.S. until market conditions improved. The trend changed as the price of oil strengthened; several OFS companies are already heading back to work in the U.S., or expanding operations, particularly in the prolific Permian Basin of west Texas.
“Canadian oilfield service, supply and manufacturing companies are in big demand of late, more so, I believe, than at any time in the past,” says Mark Salkeld, president of the Petroleum Services Association of Canada. “In the past, it was the initiative of oilfield service company owners and executives looking for overseas opportunity for a variety of reasons; one, just to broaden the customer base; two, to help level the revenue streams to offset the natural cycles in Canada with steady revenue from parts of the world where year-round work is the norm, and three, because they are being asked to.”
What has changed is producers in the U.S. are actively seeking Canadian oilfield services companies to work down south, particularly in Texas, says Salkeld. Members of the association have been talking about how producers in Texas have reached out to a few Canadian companies, making deals to operate in the Lone Star – and Permian – state.
Oilfield services companies in demand on both sides of the border are ones offering completions and completion services, he says. “We’re sitting here in Canada, from an oilfield services perspective, cautiously optimistic. We know things are still on fragile ground,” Salkeld notes, pointing toward rising volumes in the U.S. and uncertainty around major producers Saudi Arabia and Russia curtailing production impacting prices.
Hiring Locals, Knowing Market Key to Success
Canadian firms heading south need to be locally involved and part of the communities in which they wish to do business, says Art Robinson, founder and managing partner of Archer Capital Partners.
Their first priority should be hiring local people with local market understanding — people who enable quick execution, and avoid timely and costly errors, he says.
“It’s more important than sales and it’s more important than anything — to know those environments, know how to procure the equipment you need, and knowing how to insure yourself properly.”
Canadian companies must also address the needs of the U.S. clients, which can differ from Canadian-based enterprises.
“I think the customer needs are almost effectively the same: they are trying to save money. If you can’t save the customer money, whether in Canada or the U.S., you are not going to be successful,” Robinson says. “Where I think the needs really differ comes down to a geological point of view. You need to understand the geology and what is going on in the formations. You need to understand how those particular wells are being drilled in those areas.
The Trump Effect
Policy moves made by U.S. President Donald Trump have been seen as positive for the oil and gas industry, according to leading U.S. industry group the American Petroleum Institute. And increased activity south of the border could bode well to creating ongoing opportunities for Canadian service and supply companies.
Trump’s policy moves include:
- Installing Scott Pruitt to run the Environmental Protection Agency (EPA) is thought to portend an easing of regulations on drillers. Pruitt sued the EPA more than a dozen times as Oklahoma’s attorney general;
- Trump’s pick for secretary of state, Rex Tillerson, is the former chief executive of Exxon Mobil Corporation, and,
- Trump has pledged to accelerate approvals for energy infrastructure, and has given support to Keystone XL and Dakota Access.
Other moves may include opening up more lands and waters to drilling, stopping efforts to institute new greenhouse gas performance standards for refineries, as well as abandoning efforts by the EPA and Department of Interior to regulate methane emissions from oil and gas operations.
In the U.S., Trump appears to be influenced most by the small and medium oil and gas producers such as those in the Bakken and the Permian Basin, says Robert Johnston, chief executive officer of the Eurasia Group, a Washington D.C. global political risk consultancy, who spoke at a Calgary Chamber of Commerce event in late January.
“And I think those people think of the energy market as the U.S. market and their regulatory concerns are anything that is between the wellhead and the refinery,” he said. “They are not worried by global climate and all that stuff, they are worried about the Bureau of Land Management, the EPA, methane emissions, seismicity regulations and Trump will do a lot to help them.”
But the Eurasia Group also sees Trump as a wild card for stability.
The consultancy says its top risk going forward is a “geopolitical recession” — a recession driven not by economic forces but rather by the uncertainty generated by the actions of states, primarily the U.S. but other governments as well, in reacting to the actions of the Trump administration.
“The level of uncertainty is very high,” says Johnston.
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