Drilling advances

As the story goes, a couple of Rockefeller wannabes set out to dominate the roadside watermelon business in their small town, financing $1/melon to snap up most of the harvest of a local farmer. With their truck fully loaded, they staked out a prime spot along the main road leading into town. 

The quixotic duo set a sales price of $0.70/melon, figuring at that price the sales volume would firmly establish them as the neighborhood’s primo wheeler-dealers. Once the truck was empty and the money counting completed, the two realized they’d managed to come out on the losing end. After a bit of head-scratching, one of the ill-equipped entrepreneurs came up with what he saw as a brilliant solution, advising his partner, “I reckon what we need to do is get a bigger truck.”  

Analogous situation. Some may see that joke as playing out today, especially in the already margin-challenged U.S. shale sector, where the cost of goods sold, for the most part, does not coincide with market reality. The only difference is that our watermelon peddlers were able to find buyers. As the coronavirus pandemic continues to up-end global demand at an historically feverish clip, producers are looking at every available cavity, including railroad cars, to store unwanted crude. 

As such, it should certainly come as no surprise that drilling in North America and elsewhere has largely become an afterthought. According to Baker Hughes, the number of active U.S. land rigs plummeted steadily in the first quarter from 796 on Jan. 3 to 408 active rigs on May 1, the lowest level recorded since May 2016, when only 404 rigs managed to find holes to drill.

The prospects are equally grim, if not more so, in Western Canada where only 27 rigs were at work as of May 1. Though Alberta and its neighboring provinces are in the midst of the drilling-restricted Spring Breakup, which typically runs from late March to as late as early June, the April rig count is far below the nearly 66 rigs active in April 2019. At the current pace, it appears unlikely that the Canadian Association of Oilwell Drilling Contractors’ (CAODC) forecast of 80 active rigs over the second quarter will be met. Baker Hughes recorded an average 83 active rigs in Western Canada during the first three months of last year. 

The CAODC is pleading with the federal government to take steps to stave off, what it says, is the impending collapse of the Canadian oilfield services sector. “We have reached the breaking point. If we do not get the support and liquidity we need today, thousands of Canadians will lose their livelihoods, and one of Canada’s most important industries will be decimated, perhaps beyond repair,” CAODC President and CEO Mark A. Scholz said in an April 4 release. Specifically, the trade group is asking for a six-month deference on payroll taxes and other federal remittances and for the government to purchase accounts receivable from drilling contractors and service companies for $0.85 on the dollar. 

Black April. Meanwhile, hopes that an offshore drilling recovery would begin to emerge in 2020 were similarly quashed, as the new coronavirus relentlessly swallowed demand, with some projects being deferred and rig options, if taken, being re-negotiated at markedly lower day rates.  

Transocean CEO Jeremy Thigpen suggested as much on a Feb. 18 call, well before the full impact of the pandemic took root. “Its (coronavirus) near-term impact on oil demand and related effect on current oil prices impact our customers’ cash flow, and therefore, can result in delays in timing of anticipated project awards and commencements.”

Globally, IHS Petrodata’s weekly offshore rig count showed 526 jackups and floaters under contract as of May 1, down from 543 marketed contracted rigs in April. In the Gulf of Mexico, Baker Hughes listed 16 rigs at work on May 1, following a first quarter that saw the U.S. Bureau of Safety and Environmental Enforcement (BSEE) approve 16 new well permits. The federal agency issued 29 new well authorizations for the same three-month period of 2019.

By late March, some 40% of the UK North Sea workforce had joined the thousands of oilfield employees dismissed worldwide in what the head of the International Energy Agency (IEA) says will likely go down as an historically dismal year. “When we look back at 2020, we may see it was the worst year in the history of oil markets, and the second quarter may have been the worst of the lot,” IEA Executive Director Fatih Birol told the Wall Street Journal on April 16. “In that quarter, April may have been the worst month. It may go down as ‘’Black April” in the history of the oil industry.”  

The new essential. UK trade union Unite was able to forge an agreement with the Offshore Contractors Association (OCA), among others, to enable workers facing layoffs or those already cut to receive benefits from the UK Government’s Coronavirus job retention scheme. The union estimates the late March agreement would affect some 30,000 workers.

Notably, as companies across the board slash payrolls, the Coronavirus has given new meaning to what constitutes essential employees. Trevor Stapleton, HSE director for UK Oil and Gas, says housekeepers should be off-limits as sanitizing takes precedence on rigs and platforms to contain the spread of the virus in an environment where social distancing is unworkable. “We are saying that of all the people we are looking at, in terms of minimal manning, do not pick on cleaning staff,” Stapleton said, as quoted by the Aberdeen Press and Journal on March 27.

About the Authors

Jim Redden

Contributing Editor

Jim Redden is a Houston-based consultant and a journalism graduate of Marshall University, has more than 40 years of experience as a writer, editor and corporate communicator, primarily on the upstream oil and gas industry.