The Service Industry

As might be expected from such a large, open and well-established oil and gas jurisdiction, Canada's energy services industry is huge, cutting edge and increasingly global.

The sector is keen to promote itself on the international stage, and also to gain recognition within Canada of the vital role it plays in the nation's economy. Mark Salkeld, newly appointed president of the Petroleum Services Association of Canada (PSAC), notes, "The oil sector employs 800,000 people directly or indirectly in Canada, the bulk of them in the service sector. It's not well recognized that our industry employs people across Canada or that 5% of the nation's workforce is employed in some way by the industry."

In 2006, the last year for which accurate data was available, the oil and gas sector contributed $65 billion to Canada's economy, or 5%. As Salkeld notes, "That's huge! It's more than the auto industry and agriculture combined."

Drilling and well services

Canada is well served by the major international conglomerates as well as by a host of home-grown drillers, many of which are now pressing into the international arena. The drilling industry was badly hit by the triple challenges of the global economic crisis, the collapse in gas prices and the royalties hike.

"The debt crisis hit in September of 2008, just as we were about to finance a $1.1-billion deal," remembers Kevin Neveu, CEO of Canada's largest homegrown drilling company, Precision Drilling. "The global debt markets vaporized, and we were left trying to finance the deal and we managed to do so by the end of December.

"In October of that year, the chain effect of the meltdown began, and oil and gas drilling in North America came to a grinding halt. The slowing of the business was the most severe since 1984. We spent the first half of 2009 integrating the acquisition, winding down operations and trying to make our debt structure more affordable," he says.

Those that survived the tough times find themselves in a strong position; slimmer and with a loyal client base. "We got it all done. By the time the sector ground to a halt, we had a stable, safe balance sheet," says Neveu.

"Since June 2009, we've nearly doubled our activity and we've repositioned the company from being 70% gas to being 70% oil. Right now we have the most diverse footprint in North America of any service company, including Halliburton, Schlumberger and Baker Hughes," he continues.

In the 2010/2011 winter season, the rig count was up to 2006 levels with longer wells than before the recession. Utilization rates are up at 60% to 70%, very close to full capacity due to labor constraints (see Labor section below).

The good times are back for drillers, but while utilization rates are extremely high, experienced CEOs caution again getting greedy with rates. "If you treat your customers fairly in the good times, they'll remember it come the slow times," cautions Randy Hawkings, CEO of CanElson Drilling.

"With the increase in oil prices we've seen growth in demand, but that doesn't mean it's our turn to do whatever we want with pricing. We still have to respect our customers. At some point the price could get too high and end up being counterproductive to what they're trying to do. It's easy to follow the market and jack up prices, but it's smarter to lead in the area of performance thereby reducing the oil company's overall project costs."

Despite the massive upswing in demand, the message is taking its time to get through to investors and bankers. "The cost of capital has improved, but not to the same degree as it has for the E&P sector," says Brent Conway, executive vice president and CFO, Trinidad Drilling.

"This might be because North America has primarily been perceived as a 70% natural gas story, and that's changing. A lot of the returns for E&Ps are now blended returns comprising gas liquids and oil. The investors are back and they're willing to put money in, but the actual evaluation isn't quite back to where we were. Investors right now are confused and scared in terms of where to put money."

While the tough years of 2008 and 2009 weeded out some of the weaker players in the services sector, "It's still pretty competitive out there right now," says Conway. "It's not like anyone hands you anything."

Finding a position in the market is crucial. "There are lots of rigs out there with different styles of competing. Some guys compete more on price and some on capacity. We compete on a niche of quality assets and quality people."

According to Mike Buker, senior VP of corporate development at Phoenix Technology Services, "One of the problems in the directional drilling business is the low barrier to entry. Anyone can rent tools, hire an operator and call himself a directional driller.

"What we've done to differentiate ourselves is to go down the technology route with the R&D team that we've set up. That's allowed us to grow faster than our competitors due to the fact that we have specialty pieces of equipment, as well as training programs and health and safety standards that smaller companies don't have."

Says Conway, "Trinidad is known in the industry for recognizing trends in the market and getting there first."

Trinidad focused on a niche from the outset. "We started growing through the acquisition of companies that were known for their expertise on the deep side of the market. Once that core competency was built up, we began investing in our own rig designs and technologies. So we are a little unique in that we own all of our own technology. Today we can talk about being on version six or seven of complete AC drilling systems, whereas everyone else is only on version one or two."

Looking to the future, Conway says, "Pad drilling is becoming much more prevalent here and in the U.S. With that, you're able to drill multiple wells from a single pad, which lessens the environmental impact and makes it safer and more efficient because you don't have to move the rig. Pushing ahead, we are seeing rigs running on natural gas and highline power, which in the end lowers the costs for E&Ps."

For drillers, as with other development service suppliers, Canada's climate creates particular challenges in terms of cash flow and equipment and manpower utilization. During spring, early summer and autumn, the provincial governments impose bans on heavy equipment movement in order to prevent roads, sitting on water-logged soil, from subsiding. The winter "100 days of hell" are crucial to drillers. As Neveu says, "We'll drill 45% of the wells in Canada during this period."

Going global

The seasonal nature of the business in Canada sets local drillers up well for international expansion, says Neveu. "If you can manage a business that's this cyclic in nature and do it profitably, you're doing something right. Most successful Canadian service companies that can manage the cyclicality of this business and maintain a large profit margin can be very competitive anywhere. My view was to take this model into places like the U.S. where cyclicality still exists.

"If you're going to drill wells in Canada during such a short season, you have to do so safely...You have to have rigs that will stay running and move quickly...The Canadian winter-drilling season teaches us operational excellence and to ensure financial flexibility throughout the cycle. In oil services, these are two great competitive advantages."

While recognizing the strength that this seasonality has lent Canadian drillers, Neveu acknowledges that, "Canadian companies often struggle to grow from small to large," and suggests, "To go global you have to have business systems and processes and people who are measured in these processes. The industry is very risk-averse. Repeatability and predictability are so important. Having a system that delivers is critical to global growth."

While the Canadian market is very attractive, applying the techniques, technologies and working practices learnt in the WCSB to more emergent markets holds great opportunity.

Veteran Canadian and international driller Walter Dawson explains: "We went to South America to launch our latest venture, Tuscany Drilling, because we find the contracts, day rates and relationships with your clients better than in North America. It's a much better environment, in my opinion.

"The Canadian market is full of entrepreneurs who think they want to be in the drilling business because they think it's profitable, but when tough times come along they drop their prices and ruin the industry. I find the South American market to be much more pleasant.

"Our clientele are working in Ecuador, Colombia, Peru and Brazil, and all of these markets have a great deal of potential. Most of the markets there remind me of Canada in the 1960s when technology was just starting to be used. It gives us a good marketplace to start with and to grow with."

Dawson notes that the investor has been very attracted to the idea of a purely internationally focused Canadian driller. "With the worldwide need for better drilling equipment, the door was wide open for us to attract the cash. It seems to be getting better each time we go out because people are more comfortable with the idea of Colombia and Brazil."

He acknowledges, however, that capital is always tough to raise. "You have to prove your model, nobody's going to raise capital on a dream." His reputation and contact base help. "Thankfully, I had a good reputation and had brought good returns to investors in my career. It made life a lot easier."

"I've always found Canada to be an excellent proving ground," says John King, CEO of Calmena Energy. Calmena was established with the intention of going global from day one, using Canada as a test bed. "It's a highly competitive environment. Everything that involves doing it faster, cheaper and more effectively is built into this industry.

"We were looking for a platform in Canada that we could use to develop and refine a lot of the services that we thought would become more prevalent in the international markets. Some of those are new services. In many cases they're the traditional oilfield activity. Our customers are very receptive to doing new things and it allows us to pioneer new services very quickly. It really fosters a lot of innovation."

Fracing fares better

The recession years were much kinder to the fracing companies than the drillers. The trend for fracing wells increased the proportion of wells that frac crews visited and the appetite for ever more fracs per well ensured that crews spent more time at each well.

"The Canadian markets treated us quite well, but we were losing cash for a couple of quarters in the U.S.," says Dale Dusterhoft, recently appointed CEO of home-grown frac and well services success story, Trican Well Services.

On taking over as CEO, Dusterhoft had this aim: "Focus the company on a long-term vision and don't worry too much about the short-term cycle that we were in. We spent a lot of time discussing what our 10-year plan was and how we were going to get there. We have a lot of experience managing business through cycles, and the biggest thing we learned was not to decimate your business on the way down, because you need it on the way up... We kept all of our locations open throughout the crisis."

The upturn started early for Trican. "Canada started to pick up in 2009 and continued to grow in 2010. We added a substantial amount of horsepower and capacity to our business and we're able to add people to that."

Despite being a relatively repetitive business, fracing requires a high degree of innovation and Trican focuses on offering bespoke solutions. "Our model has always been to focus on technology, and particularly on customer-focused technical solutions. If our clients have problems with their wells, we want to have people who can interact with them really well, and can turn those products out quickly. If they have an issue, they can go to our lab and work with our R&D people and hopefully in three or four months find something that will solve their problem."

Trican is now one of the top 100 spending companies on R&D in Canada, in any sector.

"Innovation gives us an advantage in terms of the margins that we get from our work and a competitive advantage in terms of separating ourselves from our competition," says Dusterhoft.

Canadians are willing to spend upfront for improved revenue. "The Canadian market particularly values additional production from their wells. If they can get 10% more production by spending extra on our products, they're willing to do that," he concludes.

In the U.S., fracing has come into the public eye over the last couple of years amidst fears over contaminated groundwater and hysterical stories of flaming taps. In the sparsely populated gas lands of northeastern British Columbia and Alberta, the reaction has been far more muted and the provincial governments have not changed their stance toward fracing.

Dusterhoft is unequivocal in his belief that fracing is safe: "The science has been very clear that when we're fracturing at deep depths, we're not contaminating the groundwater.

"The issue is more about how we educate the public and change the perception that's put out there by various groups saying that fracturing is bad...We used to be very secretive about our treatments formulas, as this is where the intellectual property value lies. Now we disclose what's going into the well so that the public can understand what we're doing."

Even though the evidence suggests fracing is safe, Trican is developing potable products, perhaps in part to address the public perception issue. "We have developed some benign fracing fluids that, if they are mixed in with water, will pass drinking-water tests."

While investors have been reserved when it comes to the drilling story, they have embraced the fracers with open arms in recent months. Trican's share price has risen from a low of $11 in May 2010 to more than $23 in March 2011.

For new kid on the block Gasfrac Energy (see Enhanced Oil Recovery section for more about its NGL pumping technology), the upsurge in investor support has been particularly marked with a share price that has risen from $4.50 to over $12 in the last year alone.

"We're inundated with investor support," says Gasfrac president and CEO Reid MacDonald. "We're...able to drill in a number of different formations and we're effective on both conventional and unconventional. We work in horizontal or vertical settings and are very effective in tight shale, water sensitivity and low-pressure situations, which are all places nobody else can go but where all the reservoirs seem to be going to...The original plan was to double every year, but I believe we can actually exceed that."

EPC/EPCM contracts

The major source of the oil and gas EPC/EPCM contracts marketplace in Canada today is the oil sands. Indeed, the contracts coming out of a smallish patch of Alberta are among the largest in the world. It is predicted that $60 billion will be spent on capital projects in the next 10 years. With that sort of cash up for grabs, a competitive marketplace is becoming ever tougher.

"We've noticed our competitors have changed over the past five to seven years. Where we used to have maybe four, we now have 15," states Randy Karren, managing director of Worley Parsons. "You now have to win contracts in different ways and work harder. Customers are now far more demanding and have higher expectations because of the increase in competition."

EPC/EPCM firms need to reduce the bottom line for clients, Karren notes. "In today's market, customers are very dollar focused and you have to be able to help them out.

"In the past we have tried to execute major projects solely from Calgary or Edmonton, but it's been a real strain on our resource base and our capabilities. We are starting to see pressures in the marketplace again. In the past our reaction would have been to hire more people. Today we're still hiring those people, but we now look at job sharing. So we are looking at how much of the work can be moved and done somewhere else. We've been job sharing around the world, in particular with high value engineering in India and China and it really brings our dollar per hour price down."

Reducing engineering costs is only part of the way to win contracts in today's environment, Karren argues. Worley Parsons is looking to build long-term relationships with clients. "We enter every one-shot we have with new customers with the idea that we'd like to be their 'Improve' (Worley Parson's services and maintenance division) contractor in the future...

"Many of our competitors thrive on making a proposal for a major project, winning it, maximizing profit, finishing the job and moving on to the next one. Our model is to win the job but stick around as their improvement manager for the next 20 years. So we may not always maximize profit, but we establish a strong relationship in order to help them grow and develop in the future. It's a different type of model that certainly isn't for everyone."

Labor

Despite the abundance of very well-paid jobs, low taxes and good social services, Alberta struggles to attract sufficient skilled labor into the oil patch. Perhaps it's the weather. Labor is one of, if not the greatest challenge facing the industry today.

In the oil sands, contractors and operators are feeling the pinch and are having to be ever more vigilant when it comes to enforcing safety practices and standards.

"The more schooled employees, like engineers and mechanics, are definitely harder to obtain," notes Rod Ruston, president and CEO of North American Construction Group, Canada's largest mining contractor and a major employer in Fort McMurray. However, Ruston argues that the oil sands industry is dealing with the labor challenge: "I believe that the industry is keeping up with the challenge of having more people and more operations. I certainly think that we are.

"We have very clear training programs," continues Ruston. "We have pre-start safety talks, and processes in place to deal with anything that happens during a shift. We'll shut down a site if we see any indication of an unsafe trend starting to occur. And not just for broken limbs, either. If a lot of people are cutting their fingers, we'll shut a site down and try to understand why it's happening."

Although most jobs in the oil sands can be done year-round and companies can offer full-time employment, in the conventional oil and gas sectors most in-field exploration and development work is seasonal. Although a direct factor of the whims of Alberta's harsh winters—and thus, largely immutable—that lack of stability is a major drawback for many potential employees.

Joe Bruce, president and CEO of the Canadian division of Nabors Drilling, acknowledges the labor crunch and the impact that it is having on the industry as a whole. "Our biggest challenge isn't getting our rigs out there, it's finding skilled people to work them," he says.

"A lot of people left the industry after the downturn, and it's extremely difficult to find experienced people in the current boom of activity. As the sector ramps back up, we lose senior people to the oil companies and other service providers and the drilling contractors are suffering because of it."

John King, president and CEO of drilling firm Calmena Energy Services, notes that crewing up has been a challenge this year: "It's very difficult. It feels like everyone's stealing people from the drilling side. Of our 10 rigs, we're only running nine because we couldn't effectively crew the tenth."

The labor shortage cuts across pay and skill grades. Joe Aiello, president of consultant firm Norwest Corp., says, "We're in the business of selling hours and the disciplines we're in tend to be in really short supply, particularly with regards to experienced people. There just aren't enough people coming out of engineering schools around the world to cover the amount of people that leave the industry every year. So there has really been continued pressure in terms of attracting and retaining employees.

"We're competing with our clients for the same limiting resource, which is a real challenge," he adds. "Supporting schools and providing guaranteed jobs for students enrolled in related programs is a key part of building up a workforce for the industry. In the long run, hiring those students, even if you don't need them, really pays off."

Attracting the right people is about more than just money (which tends to be set by consensus in the industry, anyway). Randy Hawkings, CEO at recently formed 28-rig driller CanElson Drilling, explains: "The oil business is very much based on relationships, so if you can retain talented guys there's a good chance they'll know other skilled guys who want to work with them.

"There's also a lot of respect for the way business is done. We have an open-door policy, know everybody's name, and our senior managers make it out to all the rigs once a month to talk to the guys in the field."

Enfranchising employees works wonders, according to Hawkings. "We pay our staff industry standards and offer savings plans and stock options so that, in the end, everybody on board can be a shareholder. So technically, I work for the guys operating the rigs and it ultimately leads to a shift in thinking. They aren't just laborers anymore, they're shareholders, and there's a lot of pride in that. Working on a rig is a career here in Canada, and it's a good one."

Duncan Au, president and CEO of CWC, notes that while some drillers are struggling to man rigs, his company has managed to crew up this season. "According to Canadian Association of Oilwell Drilling Contractors (CAODC) data on rig utilizations, we have consistently had a higher-than-average utilization this winter....The average range is around 60%, while we're in the high 70s...The way the industry describes utilization, we would have to operate 10 hours a day, 365 days a year to score 100. That's never going to happen. Theoretically, the maximum is somewhere around 75%. So CWC is operating at a full utilization rate."

Au acknowledges, however, that times are tight and employers must be careful not to overwork crews during the three-to-four-month season. "You also have to be mindful of the number of hours that one crew can work at any given time," he says. "Sure, you could have a 24-hour operation, but that would require two or three crews. Where are you going to find the people?"

Calmena's King advocates a cautious approach to new hires. "There are a finite number of resources in the personnel area and it's stretched pretty thin already...I think you're going to find more attention directed towards safety issues. It's presenting challenges in the industry."

A key part of the solution is smoothing out the seasonal and cyclical nature of the work. As Nabors Drilling's Bruce puts it, "Over the long term, if there was level loading on activity, people might actually stick around, but we are at the mercy of the cyclical, seasonal environment we're in. People just aren't confident in the job security offered by a career in the oilfields, and until we as an industry fix that, we are going to continue to struggle when it comes to competing for labor."

"People in this sector may get paid well when they are working," explains Garnet Amundson, president and CEO of well services company Essential Energy Services, "but if there's no activity, they aren't getting paid at all. It's an industry that doesn't seem to do well with long-term planning on what we'll need for workloads to allow customers to deliver on their business plans... Demographics are working against us here in western Canada, where a lot of us are struggling to find the next generation to fill these roles.

"Immigration may help, but government policy certainly needs to be a part of it, and hopefully the industry can become more stable. In a shortage like this, the most we can do is increase wages and buy staff from each other. But that doesn't help, it only creates inflation."

One might assume that the economic crisis has given at least temporary respite to the problem. In fact, according to Amundson, it seems only to have exasperated matters. "We were already short of people in 2005-2007, when Alberta was booming, but when everything slowed down, and the royalty issue kicked in, a lot of folks had to find new places to work."

Technology may play a role in solving the labor crunch. Brent Conway, executive vice president and CFO at Trinidad Drilling, says, "It's difficult to find the guys who have 15 years of experience under their belt in an industry that's been fluctuating the way ours has. Now, new rigs have computer systems that can compensate for that lack of experience. Not only will the system tell you when something is going wrong, but it will also tell you how to fix it. So it's been worth the money we've invested in those systems."

Canadian technology

Western Canada has become one of the great innovation hubs of the global oil and gas sector, and a lot of the innovation is taking place at the grass-roots level.

Packers Plus is an example of a Canadian company that grew from humble beginnings to become a market leader in its field. "Three of us established Packers in 2000," explains president and CEO Dan Themig. "Our goal from day one was to invest in and develop technology for land-based completions. We felt that there was a real gap in the market and that not enough attention was being focused on the area. Western Canada was the ideal market and testing place for our technology, and then we could take that technology to market in Canada, the U.S. and internationally."

Back in the early 2000s, Themig and his partners, Peter Krabben and Ken Paltzat, developed the StackFRAC system, which facilitated multistage fracing. Multistage fracs had been around since well before Packers Plus, but the Packers' game-changing twist was the ability to frac multiple stages without having to remove the rig. The drill crew could come, drill their horizontal well, and hand the work over to the fracers. The days of "drill, pull drill, frac, re-insert drill and repeat" were numbered. The StackFRAC system radically changed the economics of many plays and helped open up the Bakken and Montney.

One of the keys to Packers Plus' early success was the willingness of clients to test their equipment at the well head: "Our first big break came in 2001 when we installed our first StackFRAC system in an EOG well," says Themig.

This collaborative attitude is widespread across the basin, and E&Ps understand that experimentation is crucial. As Petrobakken president and CEO Gregg Smith says, "It's important to have a team that is flexible in their approach and is willing to try and fail, because that is when we find the breakthrough that takes us to the next level in growing and developing a play."

As long as E&Ps can directly measure the results of their experimentation by extra barrels of oil produced, they seem keen to support new technology. However, when the benefit is less easy to assess and the technology is employed at the beginning of the exploration and development process, innovators may face an uphill struggle achieving market acceptance.

One such example is NXT Energy Solutions, which has developed the Stress Field Detector technology, or SFD, an airborne system that aids the identification of hydrocarbon reservoirs. The system is intended to be a precursor to seismic fieldwork, helping the user narrow down the zone of exploration, rather than replace it.

But NXT has faced difficulties finding acceptance of the SFD in the Western Canadian Sedimentary Basin, where E&Ps are focused on sweating the last hydrocarbon out of relatively small targets. According to CFO Ken Rogers, "In the earlier stages only a handful of companies had us in focus. It certainly wasn't easy in the past when the technology wasn't understood. We had some success and revenue in 2006-2008 and thought we were breaking through the resistance to new technologies in the WCSB. Then 2008 hit and we lost our core market."

NXT realized that it might find a better acceptance of the technology among those searching for large areas in immature provinces where access and security issues made on-the-ground work difficult. "In 2008 we shifted our entire focus to developing a footprint in Colombia," says Rogers, going on to explain that "an ideal survey for NXT would be a minimum of 5,000 square kilometers, where someone is looking for a target that might be 2 square kilometers. We focus people on a target.

"Colombia is attractive, because there are concession blocks there that are in the 7,000- to 10,000-square-kilometer range and there's a dearth of meaningful geophysical information. It can get complicated there because of community, environmental and land concerns that make ground-based surveys difficult, time consuming and expensive. Ideally, you want to obtain good data first before putting boots on the ground, and that's when SFD has proven most effective."