Oil patch boom turns to bust in 2001
Drilling contractors hunker down in lull
By LILY NGUYEN
Monday, December 31, 2001 – Page B1
NISKU, ALTA. -- Brian Banks is having a quiet holiday season this year.
Mr. Banks, who owns Jade Drilling Inc. in Nisku with his brother Craig, usually shuts down operations for a week when the oil patch is in a slump.
And right now, it definitely is, Mr. Banks says. Despite the peak winter drilling season, Jade's cavernous shop in the mostly industrial community outside Edmonton houses only a handful of workers. Equipment waiting to be commissioned fills the yard. And Mr. Banks has an entirely free afternoon to show visitors around, undisturbed by telephone calls from petroleum producers with drilling jobs.
It's a complete reversal from a year ago when the industry, driven by a combination of strong oil prices and record-setting natural gas prices, was in the throes of one of the fastest developing booms to hit Alberta oil patch country.
As Alberta natural gas spot prices soared to a heady $13 per 1,000 cubic feet last December -- leaping above $17 in one record-setting trading session -- the Banks brothers paid workers overtime to keep the rigs running over the holidays, right through Christmas Day.
Mr. Banks also took the opportunity to expand the private contracting company with 13 permanent employees -- and as many as another 175 when the rigs were busy. It invested millions to build another three drilling rigs in addition to their existing 10, enlarging the company by almost one-third. It's the most they'd ever built in one year. They had added two in 1997, during the last boom.
"We grow when the market dictates," Mr. Banks said.
But even going flat out, drilling contractors couldn't keep up with the demands of petroleum producers anxious to suck gas out of the ground to get to thirsty markets.
Drillers scrambled to find enough people to man ever-operating rigs, running advertisements as far as Eastern Canada. Jade boosted salaries and offered retention bonuses to try to keep long-time employees also being wooed by the booming construction trade.
"We just couldn't find anyone. We weren't sure our human resources manager would make it through the winter in one piece," Mr. Banks said.
The good times lasted well into the spring, typically the slow season when boggy ground makes it hard to drill. But with gas prices holding at more than double their historical $2-to-$4 range, oil prices still near the $30 (U.S.) a barrel level, and analysts forecasting a permanent higher-price environment, the industry kept up its blistering pace.
For the first time in Mr. Banks' memory -- and he has spent most of his adult life in the business -- drilling contractors raised their rates in the spring. Led by Precision Drilling Corp. and Ensign Resource Service Group Inc., Canada's largest oil field service companies, rates jumped by about 10 per cent, he said.
"I'd never heard of it before. In the fall, as we go into the busy season, people will raise rates, but never in the spring," Mr. Banks said.
But a sharp reaction to high gas prices combined with a slumping economy took its toll. While producers cranked the taps open on gas production, big industrial customers such as fertilizer and petrochemical companies were shutting down factories. Then a summer of mild weather set in throughout the continent -- rendering energy-hungry air conditioners unnecessary -- and the so-called energy crisis was over.
Gas prices slipped to $5 (Canadian), then $4, then $3. Oil held out a little better, slipping but still holding at the high end of the $22 (U.S.) to $28 range set by the Organization of Petroleum Exporting Countries. It was still enough to generate profits for producers, but from gushers they slowed to steady streams. At Jade, the phones quieted down as one-time "spot" drilling jobs became scarcer and long-term contracts became the mainstay. Nobody talked about building new rigs.
"There's a direct correlation between our activity level and the price of our commodities," Mr. Banks said.
But Mr. Banks, like many in the industry, was still holding out hope for a quick bounce back, tied to an economic recovery. After all, oil and gas drilling usually slackens off in the summer, so it was hard to separate the seasonality from the slump.
"In summer, the industry always slows down. Even when it's really busy, it's just a little slower," he said.
Then in September, the other shoe -- oil prices -- dropped in a way nobody expected when two hijacked planes slammed into the World Trade Center.
Oil prices, which initially leapt higher on speculation that Middle East supplies could be in jeopardy, slammed into reverse when it became clear that while the oil would keep flowing, the economy was coming to a standstill. Oil demand was hit both indirectly, through the slump, and indirectly, as jet fuel demand dried up.
At the same time, any hopes of a rebound in natural gas prices faded away once recession became all but certain.
"As soon as you see demand slack off, you know it's going to be much slower than anticipated," Mr. Banks said, adding that the oil patch put the freeze on all new projects for a couple of weeks following the attack.
By the time activity returned to a semblance of normal, it was clear that commodity prices had cracked through the floor the industry had set back in the spring, and were likely to stay in the basement for a while.
Like many industry watchers, Mr. Banks is now reluctant to forecast where commodity prices, and therefore his company's activity level, are headed in the short term.
There are too many unknowns, he said: the outcome of the U.S. war on terrorism, its impact on oil-exporting countries in the Middle East, the possibility of a price war between OPEC and non-OPEC, an economy apparently at the mercy of consumers' mood, and, as always, the weather.
Mr. Banks said he's planning on the slowdown lasting about a year, perhaps longer, since even if prices pick up, it takes a while for producers to call out the drillers.
But after 23 years of running Jade with his brother, he refuses to be worried.
"You get used to it. We've seen downturns lots of times," he said confidently, noting the company weathered a prolonged slump from about 1986 to 1993 and could probably last about four years without a pick-up in the industry.
As one of the few -- and oldest -- remaining large independent contractors, he and his brother now know how to deal with the downtimes, he said. They have stockpiled key equipment bought at cheaper prices, kept debt to a minimum, and built rigs only on available cash or a long-term contract with a producer willing to guarantee enough work to pay for the rig. They're also funneling work toward core employees, the ones who've been working on their rigs since day one. That way, skilled employees will already be in place when business picks up.
"You've got to be a squirrel and put nuts away," he said.
-*** |
