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Oil prices are inching towards US$100 a barrel.
The head of Canada’s largest pipeline company believes we’re in the middle of an energy crisis.
Oilpatch drilling activity is exceeding expectations for the new year.
The prospects are improving for Canada’s oil and gas sector — just don’t call it a boom, says Precision Drilling Corp. CEO Kevin Neveu.
“The outlook is very promising and the really good part of this right now is that it’s not a runaway boom,” Neveu said in an interview after Precision, one of the country’s largest drillers, reported fourth-quarter results on Thursday.
“Booms are always followed by busts.”
Across the oilfield services sector, a recovery is taking place.
The industry jettisoned thousands of employees in 2020 when oil prices sank like a stone and producers took a chainsaw to their budgets.
The early stages of the bounce-back began later that year and into 2021. And 2022 is continuing the ascent.
The winter drilling season in Western Canada is busy. Neveu expects customer demand for the second quarter to run 25 per cent above levels from a year ago.
Other drillers are also expecting a stronger year.
“The first six weeks of 2022 have been fantastic,” said Duncan Au, CEO of CWC Energy Services Corp., which operates contract drilling and well servicing rigs in North America.
“Every available crew that we have on our rigs is working … If we had more crews, we’d have more rigs working.”
Rising energy prices are fuelling the buoyancy, while global oil demand has almost fully recovered to pre-pandemic levels.
Earlier this week, a U.S. Energy Information Administration report said oil consumption reached 99 million barrels per day (bpd) in January and will top 2019 levels this year.
A decline in global exploration in recent years has limited production increases, even as West Texas Intermediate crude has rebounded. It traded briefly above US$94 a barrel on Friday, reaching its highest point since 2014.
Many analysts expect oil prices to temporarily top US$100 a barrel due to ongoing supply constraints, and with tensions escalating between Russia and Ukraine.
An increase in geopolitical anxieties or a sluggish response from U.S. shale producers to boost output could easily push prices above the triple-digit mark, said Rory Johnston, managing director and market economist at investment firm Price Street.
“If I was betting man at this exact point, I think we’re going to see it before summer, but it won’t last,” he said of $100-a-barrel oil.
High prices are setting the table for record cash flow levels for petroleum producers, although most companies are staying focused on returning money to shareholders through dividends and share buybacks.
Industry capital expenditures in Canada are expected to rise by about 23 per cent to $32.8 billion this year, according to Stifel FirstEnergy.
The largest change with this price cycle is producers have shifted away from spending all of their cash flow (or more) on capital expenditures to somwehere between 30 and 50 per cent, said analyst Cole Pereira of Stifel FirstEnergy.
However, overall spending is increasing, gradually.
Heading into 2022, the Canadian Association of Energy Contractors forecast almost 6,500 oil and gas wells would be completed this year, with 210 rigs active during the first quarter.
The association now expects 20 additional rigs will be working between January and March.
“We were worried about Omicron and how that would impact activity. To be honest with you, it really hasn’t,” said president Mark Scholz.
On Thursday, 227 rigs were working in Western Canada, up about one-third from a year earlier.
These factors are all pointing the needle in the right direction.
Just don’t expect to see the sector’s rapid expansion of past booms.
“There is good international demand, Canada is definitely picking up, but it’s a bit of a muted response, relative to the strength of commodity prices,” said Total Energy Services CEO Dan Halyk.
“If this was 2013-2014 when you had a nice uptick in oil prices, you’d be going crazy. It’s not going crazy, but it has definitely picked up.”
Other pressures remain on the horizon, from ESG concerns to growing decarbonization efforts.
Public oil and gas companies are only modestly increasing spending plans, even with surging cash flow levels.
On Friday, Enbridge CEO Al Monaco said he expects producers to maintain their disciplined approach to growing production.
“We are in the middle of an energy crisis,” Monaco said on a conference call.
“The economic recovery is driving strong global energy demand and normally we’d see a supply response — but not this time, given the significant underinvestment in both conventional and renewables.”
There are some signs that U.S. shale producers are starting to react to higher prices.
On Friday, Baker Hughes reported the rig count south of the border jumped by 22 this week to 635, its largest increase in four years. U.S. production is climbing, projected to average 12 million bpd this year.
Aside from the expected bump in Canadian drilling activity during the second quarter from 2021 levels, Neveu believes the July-to-September period could match, or exceed, the first quarter.
“This (period) right now is a nice, slow, gradual, patient recovery rather than a boom, which for the long term is much healthier,” he added.
“Capital markets are prepared to support the industry if we are going to be disciplined. And that’s different than every other rebound and boom-bust cycle that we have been through in Alberta.”
Chris Varcoe is a Calgary Herald columnist.
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