Economic Pain Before Recovery

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The Canadian Association of Oilwell Drilling Contractors (CAODC) revised its annual drilling activity forecast – and scratched its earlier estimate of $85/bbl WTI – as oil prices tanked in late 2014 and stayed low into the early months of 2015. Not since 2009 have circumstances required a revised forecast, with prices having plunged 60 per cent since highs in the summer of 2014.

CAODC forecasts the depressed price of oil and natural gas will reduce the number of active drilling rigs in service in Western Canada, resulting in an industry-wide slowdown and job losses. Assuming WTI averages $55/bbl in 2015, CAODC forecasts the number of active drilling rigs in service to drop to 203 per day from an average of 370 per day last year.

CAODC projects decreased drilling activity could result in direct job losses of up to 3,400, in addition to 19,500 indirect jobs. Around 25-30 per cent of CAODC members’ operating hours occur in Saskatchewan.

President Mark Scholz sees months of pain ahead for drillers, which will transition to survival mode until commodity prices recover. As Saskatchewan Oil Report goes to press, CAODC reports casualties have so far been minimal. But, Scholz cautions: “The longer this prolongs, the more likely there are going to be additional companies in very difficult positions.”

“Companies are just trying to survive right now,” reflects Scholz. “Their day rates are being hit very hard. Pressures from producers are hitting hard. It’s just a very brutal experience for a lot of our members.”

The economic forecast estimates first quarter results could see 35 per cent fleet utilization – compared to an average year at 55 per cent. Second quarter utilization is expected around 12 per cent – half last year’s. Overall for 2015, the association expects fleet utilization to drop to 26 per cent from 46 per cent last year.

With first quarter utilization down by 20 per cent, companies will see significant strains on cash flow through 2015. The first quarter provides the bread and butter to sustain work throughout the rest of the year, explains Scholz. With the hit to cash flow, it will take more time for companies to accumulate the funds required reinvest in production.

CAODC considers the $55/bbl average a realistic overall estimate for 2015, but still expects to see price volatility throughout the year. The reality is, explains Scholz, no one knows for sure what the price will do in the coming months.

“The volatility we see in the market that we see today is something that a lot of people haven’t seen in a very long time,” he states.

Until commodity prices recover, companies are working to minimize fixed costs as much as possible.

“I think every kitchen cupboard is being explored for cost savings,” says Scholz. “The challenge is that the longer we’re in this period, the longer it’s going to take to come out.”

Despite the tumult in recent months, the long-term prospects for oil and gas in Saskatchewan are sound. In 2013-14, oil and gas provided $1.6 billion to the provincial economy, and Saskatchewan’s plentiful resources provided 15 per cent of Canada’s total crude production. Remaining recoverable gas reserves are estimated at 52.1 billion cubic metres. Significant opportunities persist in shale gas in central and east-central Saskatchewan, as well as 2.7 million hectares of oil sands potential.

“Long term, I think the business is still a good one to be in. This is just part of the oil and gas business,” comments Scholz. “This is something the industry’s been through, and we’ll get through this one. We’re just hoping we get through it with as minimal bumps and bruises on the way through it, and as few casualties as possible.”

A crucial part of the recovery will come from retaining key crew workers and by keeping rigs working as long as possible. The loss of drillers, rig managers, and derrick hands to other employment opportunities in 2009 impeded the recovery, as the tickets and training for new recruits can be costly. Scholz hopes to see members able to hold onto their most valuable asset – their staff.

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