This year has been the worst the Canadian oil industry has seen in modern times when it comes to drilling, and next year isn’t looking a whole lot better.
In its annual forecast for the coming year, released on Nov. 18, the Canadian Association of Oilwell Drilling Contractors (CAODC) expects next year won’t be the worst, but it’ll likely be the second worst.
For 2021, they are projecting 3,771 wells drilled, a 14 per cent increase of 475 from 2020. But to put that in perspective, the forecast also notes in 2019, there were 5,545 wells drilled, and back in 2014, there were 13,089 wells drilled. The reduction from 2014, when oil was US$100 per barrel for West Texas Intermediate oil, is 9,318 wells, or a decline of 71 per cent.
The numbers are not broken down by province, but CAODC president and CEO Mark Scholz said by phone from Calgary that historically Alberta accounts for 65 per cent, Saskatchewan gets 25 per cent, and the remaining 10 per cent is split between British Columbia and Manitoba. However, with stronger natural gas prices propelling activity in gas-rich British Columbia, that may change the balance.
“We think there’s probably going to be a fairly big upside for B.C, parts of the Montney. And really driving that natural gas story is pricing, it’s come together quite nicely for natural gas.”
He noted the price for natural gas has gone up from $1 per Mcf (thousand cubic feet) to $3 per Mcf.
The CAODC expects a continuing trend in the reduction of drilling rigs. By the end of 2021, they are expecting the fleet to shrink from the current 505 drilling rigs to 478.
He noted that even if double their expected forecast of rigs went to work in the first quarter of 2021, that would still leave about half of the fleet sitting.
“I think there’s still more room for thinning of the herd, when it comes to rigs,” he said.
They are also expecting to see a substantial number of service rigs cut from the fleet as well.
“We’ll also see the same story on the service rig side,” Scholz said. “I’m assuming about 100 rigs on the service rig side will come off our registry.”
There are currently around 700 rigs in the service rig fleet. He expects most of the shedding of rigs will come in the fourth quarter this year and first quarter next year.
One of the reasons for this includes rigs being no longer marketable. Scholz said, “The other the other reason, which again, is more concerning, and I think it highlights the plight of the industry, is the fact that a lot of our companies don't have the financial resources, and can't raise capital sufficient capital to actually recertify this equipment.”
He said some equipment is houred-out, and until there’s an indication of robust activity in the future, it’s hard to justify putting money into recertifying equipment.
The higher natural gas price, as well as the Accelerated Site Closure Program, are upsides. He noted Saskatchewan is receiving $400 million under the $1.7 wellsite abandonment and reclamation program. “We do have some guys that are working under that program,” he said.
With the Trans Mountain Pipeline and Coastal GasLink Pipeline under construction in British Columbia and Alberta, that’s another positive sign. The Keystone XL pipeline, while under construction, is under threat as President-Elect Joe Biden has said he would cancel it.
Scholz said he’s a little more optimistic than others regarding Keystone XL, as there are a lot of jobs involved and that will be important, noting that what’s said in an election may be different than how one governs.
Scholz said it’s important to temper this forecast as there is still a “tone of market volatility and uncertainty out there.”
A key one is the impact of the COVID-19 pandemic, and the possibility of two vaccines in short order that may help resolve the issue. Lockdowns due to the pandemic are another factor, especially on oil demand.
How closely OPEC (the Organization of Petroleum Exporting Countries) and its allies create discipline in the market to get through this next period of market uncertainty is important, he said, noting, “We are very much dependent on them to keep pricing at that US$40 to US$45 benchmark.”
Scholz said that US$50 per barrel for WTI is the next pricing level where oil companies are likely to deploy more capita.
“Forecasts are like political polls, they last a very short time, and our assumptions may change,” he said, noting the industry could end up singing AC/DC or the blues.
“The Canadian energy industry is at a crossroad unlike anything we have ever experienced,” Scholz said.