After a dismal 2015 and 2016 — marked by record low activity rates, thousands of layoffs and battered financial results — producers and oilfield services (OFS) companies across North America certainly hope so.
A number of positive investment announcements in the sector coupled with an uptick in industry activity at the end of 2016 have the Canadian oil and gas industry hoping the momentum continues into 2017.
On the positive side of the ledger, both the Petroleum Services Association of Canada and the Canadian Association of Oilwell Drilling Contractors expect more wells will be drilled this year than 2016, although both associations emphasize the industry is still in a depressed economic environment.
PSAC estimates that 4,175 wells will be rig released, up from an estimate of 3,900 in 2016. The CAODC is more bullish — forecasting 4,665 wells will be drilled in 2017, an increase of 1,103 from 3,562 in 2016.
Signs of a drilling increase started to appear at the end of 2016, with the active rig count reaching close to 270 in the second week of December, the highest rig count since February 2015. And that trend has since carried forward into 2017. Thus far, Canada rig counts (courtesy of Baker Hughes) are up nearly 100% year over year.
Also positive in global markets was the Nov. 30 agreement by OPEC to curb production by 1.2 million barrels per day from January. By mid-December, 11 non-OPEC producers agreed to join the effort and reduce output by 558,000 barrels per day. The implications of this decision are already being reflected in the price of oil. In January, West Texas Intermediate hit a level that is 100% higher than January of 2016.
Let’s hope the OPEC decision is a sustained positive. Prices have lifted since those announcements and early signs appear to suggest producers are acting on their plans to cut output.
The service industry has also reacted positively to the announcement by the Canadian government to approve Kinder Morgan’s proposal to more than double the capacity of its Trans Mountain pipeline. The federal government also approved Enbridge’s plan to replace Canadian segments of Line 3, which carries crude from Alberta to Wisconsin.
These pipeline projects will generate thousands of construction jobs as well as thousands of additional jobs for the pipelines ongoing operation. Steel manufacturers and equipment suppliers across Canada will be positively affected when construction starts on these lines, as will the supply chains for upstream operations.
The pipelines are not going to be built overnight and they face opposition, but the mere fact the pipelines are getting approvals shows the federal government is aware of the need to increase export networks and improve access to tidewater.
I believe the Kinder Morgan expansion project, in particular, is good news for the Canadian oil and gas industry. Canada needs access to markets other than the U.S. and the Trans Mountain expansion can feed the growing demand in Asia.
Still, and despite the encouraging signs, I believe it will be a slow climb back for industry.
The free fall of the oil price and the precipitous drop in activity over the past two years decimated profit margins for both exploration and production (E&P) and OFS companies. One of the concerns that will carry into 2017 is who will have the cash and capital to finance an increase in activity.
Many E&P companies have reset their houses so they can be profitable at lower commodity prices — wherever they land in 2017. Light oil producers in particular seem to be in better shape, and some, Crescent Point, ARC Resources, among others, have already increased their budget forecasts for 2017 over 2016.
And if oil prices stay in a band between $50 and $60, OFS companies will look to rehire for the expected level of activity. Unfortunately, one challenge some services companies may face is a shortage of staff; many workers have left the patch and may not return.
Another question mark for industry is the effect of provincial and federal carbon taxes and how much they might mute any optimism. Under the federal government’s plan, carbon emissions would cost $10 a tonne in 2018, rising by $10 a year until it reaches $50 in 2022. In Alberta, the existing carbon levy of $10/t rose to $20 January 1, 2017 and will rise incrementally to meet the federal rate by 2022. Other provinces can either implement a carbon tax or a cap-and-trade market and hold-outs such as Saskatchewan will have a price imposed by Ottawa. Whichever plan is adopted, adding more costs will have a negative impact on companies’ overall margins.
The effects of a Trump presidency, given the statements he’s made around trade, taxation and energy independence, add uncertainty in the near and longer term to the energy industry in general and OFS in particular.
This newsletter will be addressing that wild card as the situation south of the border unfolds with the new administration’s policy direction.
Despite these potential challenges and all the uncertainties, many of the business owners I talk to believe 2017 will better than 2016. The Canadian oilpatch is trying to rally back. And after two years of negativity, 2017 could be the start of a prosperous oilpatch in Canada going into 2018 and into the future.
MNP LLP understands the oilfield services industry – its drivers, challenges and opportunities. For more information on MNP’s OFS services, contact Jeremy Rondeau, Vice President, OFS Services, at 306.773.8375 or [email protected]