In the snowy prairies of Western Canada, not even temperatures below -40 degrees have stopped Stampede Drilling Ltd.’s 60 recently rehired workers from manning the oil-service provider’s rigs after a nine-month dry spell for the business.
“Once oil hit $50, everybody started phoning again,” Bill Devins, the drilling company’s 57-year-old owner, said in a phone interview from his office in Estevan, Saskatchewan, a town bordering North Dakota right at the heart of the Bakken shale formation. “We started to have some activity come our way.”
From the tight-oil plays of Saskatchewan to the oilsands of northern Alberta, Canada’s energy producers are returning to growth mode after more than two years enduring the worst market rout in decades. They are leaner and more efficient after cutting staff, shelving projects and reducing costs since the downturn. Cheaper crude doesn’t feel so painful any longer.
Companies such as MEG Energy Corp., Canadian Natural Resource Ltd., Cenovus Energy Inc., Encana Corp. and Seven Generations Energy Ltd. have all announced plans to expand production. Calgary-based Precision Drilling Corp. hired and recalled about 1,000 field workers to reactivate rigs in Canada and the U.S.
The renewed focus on expansion happens as the Organization of Petroleum Exporting Countries cuts output and after the Canadian government in November approved construction of two expanded oil pipelines that will add almost a million barrels a day of export capacity to Western Canada.
“A lot of companies have started increasing capital budgets,” Amir Arif, a Calgary-based analyst at Cormark Securities Inc., said by phone. “They are getting more comfortable in the $45 to $60 oil world. The stability in the oil price is a key factor.”
Crude has rallied on the back of the OPEC-led supply cuts, trading mostly above $50 a barrel in New York since a Nov. 30 agreement. While that’s nothing like the industry’s heyday years of about $100 before the crash, it’s a big improvement from the near-$25 doldrums of a year ago.
MEG plans to spend $590 million in operations this year, almost five times more than in 2016, as it expands production at the Christina Lakes oilsands site by about 25 per cent. Cenovus will proceed with a 50,000-barrel-a-day expansion of its own Christina Lake project and Canadian Natural is moving ahead with its 40,000-barrel-a-day Kirby North project. The three ventures represent the first oilsands expansion announced since the downturn began.
The rosier outlook is filtering into Western Canada. Alberta’s economy will grow 2.1 per cent this year, tying with British Columbia for second-fastest among Canadian provinces behind Ontario’s 2.3 per cent, according to the median of forecasts compiled by Bloomberg. The growth follows two straight years of economic contraction in the oil-rich province and will be largely due to the rebuilding of Fort McMurray, the gateway to the oilsands that was devastated by wildfires last year. Saskatchewan, the country’s second-largest oil producing province, will also emerge from a two-year recession to grow 1.7 per cent.
Oil companies that form the backbone of the western Canadian economy cut capital spending 50 per cent in the past two years to C$17 billion in 2016, according to the Canadian Association of Petroleum Producers projections. About 110,000 jobs were lost between late 2014 and April of last year, CAPP said. The number of rigs drilling for oil and natural gas in Canada has jumped almost 40 per cent from a year ago, after falling to the lowest since the early 1990s last year, according to data from Baker Hughes Inc.
To be sure, the economy is only beginning to recover. In Alberta, holder of the world’s third-largest crude reserves, the unemployment rate dropped to 8.5 per cent last month from 9 per cent in November, the highest in more than 20 years.
In Calgary, the headquarters for most Canadian energy companies, almost 25 per cent of office space was vacant in the third quarter, according to New York-based Cushman & Wakefield, a real estate service company. Vacancies are going to rise to as high as 30 per cent by 2018 as downtown office buildings such as Brookfield Place and Teles Sky open their doors, Stuart Barron, the company’s Toronto-based national director of research, said by phone.
“There is more optimism but the market is not going to turn around on a dime,” he said. “Its going to take another year or two to see strengthening.”
For oil companies, a return to the days when 200,000-barrel-a-day new oilsands projects were routine is unlikely, Stephen Kallir, Canada upstream research analyst at Wood Mackenzie Ltd., said by phone. Most oilsands expansions announced in recent months were projects that had already had capital invested in them, he said. Energy companies in Canada may also focus more on shale plays, where investment returns are realized more quickly than in the oilsands.
“The aftershock and, for lack of a better word, hangover of the past two years is going to linger for quite a while in terms of how capital spending decisions are made,” he said. “There is going to be a lot more prudent approach.”
Much of the growth will be concentrated in Saskatchewan, where a less challenging geology means more wells will be tapped this year than in Alberta, according to the Canadian Association of Oilwell Drilling Contractors and Petroleum Services Association of Canada. That’s good news for Stampede’s Devins, who’s watched people move away and local businesses close up including a Staples and a motel. The new year has started out good.
“It’s probably as active as we’ve seen in two years for sure,” he said.