Keeping Our Cool—A Perspective From the Great White North

The current collapse of oil prices and the continuing downward pressure on natural gas prices have been a double whammy for the Canadian oil patch.

At least while oil was attractive, players could be liquids-focused; but now, that once-safe haven has been eliminated. The repercussions of this downturn here are now rippling through industry, governments and society at large.

In the face of much-reduced cash flows, companies are reshaping their capital budgets, with the viability of some outfits now in question.

Initial indications are that manpower levels will be the next target. And as the annual report cycle progresses, the reassessment of reserves will not be a pretty exercise. Our service sector, always on the leading edge of field activity levels, can be expected to bear the initial brunt of these changes.

Strangely, this situation appears to have been forecast by only a handful of people.

But hey! Haven’t we seen this show before?

In the early 1980s, increasing supply driven by high prices combined with a slowing of demand led to a similar opening of the taps in the Middle East in an effort to regain market share. This triggered a slippage in oil prices, the effects of which were compounded in Canada by a deteriorating business climate and an interventionist federal government program of taxes and policies.

The downside of that situation took half a decade to sort itself out.

We seem to be on the cusp of a similar predicament today, although events have unfolded in a much more rapid fashion in the current unregulated marketplace.

Please log in to read the full article

The current collapse of oil prices and the continuing downward pressure on natural gas prices have been a double whammy for the Canadian oil patch.

At least while oil was attractive, players could be liquids-focused; but now, that once-safe haven has been eliminated. The repercussions of this downturn here are now rippling through industry, governments and society at large.

In the face of much-reduced cash flows, companies are reshaping their capital budgets, with the viability of some outfits now in question.

Initial indications are that manpower levels will be the next target. And as the annual report cycle progresses, the reassessment of reserves will not be a pretty exercise. Our service sector, always on the leading edge of field activity levels, can be expected to bear the initial brunt of these changes.

Strangely, this situation appears to have been forecast by only a handful of people.

But hey! Haven’t we seen this show before?

In the early 1980s, increasing supply driven by high prices combined with a slowing of demand led to a similar opening of the taps in the Middle East in an effort to regain market share. This triggered a slippage in oil prices, the effects of which were compounded in Canada by a deteriorating business climate and an interventionist federal government program of taxes and policies.

The downside of that situation took half a decade to sort itself out.

We seem to be on the cusp of a similar predicament today, although events have unfolded in a much more rapid fashion in the current unregulated marketplace.

Now What?

The question in Canada, as elsewhere, is “How should the industry react?”

Some financial measures by companies to protect themselves are a given, but on the subject of preparing for the future, there is considerable divergence.

A few players are upbeat, hoping for a quick turnaround and therefore will not resort to drastic measures – at least not yet.

Others are of the doom-and-gloom mindset, perhaps remembering previous downturns and believing this correction will take several years to play out and harsh measures are therefore in order.

Perhaps the silent majority hope there is a middle ground in which new technological breakthroughs combined with a reduced cost structure will provide a salvation.

Are there any factors in the current context that make this downturn fundamentally different from previous ones?

The answer is “yes.”

High-cost unconventional production of both oil and gas is far more important across North America right now than at any time in the past. Oil and gas in shales, tight sandstones and tight carbonates as well as oil sands have been in the limelight for the last decade. We have seen flush production from both oil and gas commodity streams. Many have pointed to large production volumes from this group of assets as at least a partial trigger for the price collapses.

So how will unconventional resource plays fare in a low price environment?

First, we don’t have a good sense for where these plays sit in terms of their creaming curves; maybe they would have peaked already and become stable at best.

Also, unconventional production is generally high cost and requires continual re-investment in new wells, given the rapid decline in production rates for individual producers.

So presumably, if unconventional plays are now both uneconomic and starved of capital, their production will dwindle and we will have to contend with either shortages or increased imports.

One of the attractions of these sorts of plays has been the idea that they are a sort of “manufacturing” operation that can be turned on and off as a function of prices. The validity of this model is questionable, however, if the structure of the industry – be it infrastructure, services or people – is damaged in a prolonged downturn.

And let’s not forget about the societal opposition to many well stimulation and completion methods – for example, opposition to the use of hydraulic fracturing in some of the new prospective regions in Canada and the United States.

For many players, it may be “once burned, twice shy.”

One sphere of activity that has been ignored for this last decade, at least in onshore North America, is the conventional prospect world.

Should we be considering a renewal of activity in traditional fairways?

Virtually all of the interest in conventional plays dwindled in the face of the huge volumes attributed to unconventional plays. But if the latter stumble due to reduced investment, perhaps our trusty old plays, combined with the rejuvenation of older fields, can come to the rescue.

Don’t Overcorrect

North America has a voracious appetite for oil and natural gas that may even increase in a lower price environment. Today’s hydrocarbon glut could turn into tomorrow’s shortfall, if production and reserve replacement start to slip.

As unconventional production falters, our industry may be called upon to re-enter those conventional play fairways that have been ignored in recent years.

If that happens, where will we find the skilled workforce to do this if experienced staffs have been laid off?

Fully functional integrated teams cannot be re-created overnight, and rash cutbacks could easily be counterproductive.

The challenge for the Canadian industry will be to try to anticipate how this complicated interaction of supply and demand will work itself out, and to be ready to remobilize when the time is right.

If we allow our exploration and production capabilities to be degraded in a moment of crisis, we will not be able to fulfill this mission. Farsighted management in our industry is essential, on both sides of the border.

We need to look at how recent advances in technology and successful ventures elsewhere in the world can help us profitably re-enter some of our old stomping grounds – whether that be in western Canada or the frontiers.

Let’s make sure that we keep our powder dry for the next chapter in this unfolding drama.