February 17, 2015 / 12:12 AM / 4 years ago

Canada energy industry deflation squeezing service providers

CALGARY, Alberta (Reuters) - After years of enduring spiralling operating costs Canada’s oil and gas industry is being hit by price deflation, as producers push to share the pain of low crude prices with contractors, service providers and suppliers

An oil pump jack pumps oil in a field near Calgary, Alberta, July 21, 2014. REUTERS/Todd Korol

Lower costs have eased some of the bite from slumping oil prices for producers who have seen profit dive over the last six months.

But there is no silver lining for the hundreds of oilfield service providers - ranging from drillers to well service firms to trucking companies - that are having to jostle for business by dropping prices and renegotiating contracts.

“The pressure on pricing was almost instantaneous and right across the board,” Precision Drilling Corp Chief Executive Kevin Neveu told investors on Thursday after Canada’s largest drilling contractor reported a steep loss.

Customers have been quick to press for reduced drilling costs and spot market rates are down between 10 and 20 percent, he said.

One employee at an environmental and drilling services company in Calgary, who declined to be named, also said most producers had targeted a 20 percent cut in operating costs.

Many suppliers and service providers have offered at least that discount or more, the employee said, on the assumption that if they do not, a competitor will.

Canadian Natural Resources Ltd sent letters to suppliers and contractors late last year asking them to consider what they could do to cut their rates, Chief Financial Officer Corey Bieber told a conference in January.

Many came back offering a 10 percent reduction, but Bieber said Canadian Natural was looking for more.

Mark Scholz, president of the Canadian Association of Drilling Contractors, said some drillers are operating almost at cost in order to keep as much of their fleet working in the field as possible.

These lower operating costs help keep production going even at U.S. crude’s recent five-year low around $44 a barrel, suggesting global prices may have to fall even further to curtail new supplies.


No producer welcomes falling crude prices. But executives including Canadian Natural’s Bieber say operating costs have mushroomed in recent years, and the slowdown could be an opportunity to bring them back under control.

The tight labor market in Alberta and remote location of projects meant competition for workers and materials was fierce, inflating wages and prices.

Statistics Canada data shows the average weekly wage for workers in mining, quarrying and oil and gas extraction in November was C$2,090.98, more than double the national average.

Husky Energy Inc is planning C$400 million to C$600 million in operating cost savings this year from its C$3.0 billion to C$3.1 billion budget.

Canada’s largest oil and gas producer, Suncor Energy Inc, is aiming to save C$600 million to C$800 million over the next two years, with 20 to 30 percent of that expected to come from contractors, consultants and professional services.

Suncor Chief Executive Steve Williams said there was “definitely” deflationary pressure in the contracting and construction business at the moment. He cited cheaper fuel, fewer fly-in, fly-out oil sands workers and improving workforce productivity as examples of falling costs.

Suncor trimmed production costs by more than C$2 per barrel since last year, while Canadian Natural revised its 2015 outlook to reflect an expected C$1 drop in oil sands mining costs.

Mike Wittner, Societe Generale’s head of global oil research in New York, said the question of how much further operating costs could drop was “a wild card.”

“It has a way to play out. It’s just started, it’s hard to say at this point where we end up,” Wittner said in Calgary last month.

Editing by Jeffrey Hodgson and Matthew Lewis

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