Varcoe: Oil spending is rising, but labor shortages are preventing growth

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It’s taken a while to get here, but Canadian conventional oil and gas producers are spending more money as commodity prices rise.

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Part of the increase is due to inflation and cost increases of 10-15%. Some of it is directed to more drilling activity and modest increases in production.

However, challenges stand in the way of more capital expenditure and field activity: a lack of equipment – ​​and personnel – in the oil service industry to make this happen easily.

“The incentive is definitely there to put as much capital as possible into the ground,” Peyto Exploration & Development CEO Darren Gee said on a first-quarter earnings call Thursday.

“The challenge, of course, in doing that is that we’re kind of at the limit of people and equipment and how much we can do.

“The industry, however, is kind of exploited.”

With today’s high prices, Peyto sees payment for new wells within three to six months, but prices remain volatile and there are limits on the additional work that can be done due to labor shortages, Gee said in an interview.

With energy prices soaring, much of the oil sector has posted strong first quarter results in recent weeks, marked by massive increases in cash levels, rising profits and more cash returned. to shareholders in the form of dividends and share buybacks.

Energy prices have soared this year following Russia’s invasion of Ukraine. West Texas Intermediate oil closed above US$110 a barrel on Friday, while benchmark US natural gas prices stood at US$7.67 per million British thermal units.

Peyto said its net profit jumped 154% to $98 million in the first three months of the year. Funds from operations broke a company record and reached $203 million; throughout 2020, the company’s annual cash flow level was just $212 million.

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Earlier this week, Crescent Point Energy reported net income of nearly $1.2 billion in the quarter, up from $22 million a year earlier.

Some companies have recently increased their investment budget.

On Thursday, Headwater Exploration announced a 59% increase in its capital budget – to $230 million – as it ramps up production.

The small oil producer has a new area to develop and Headwater Chairman Jason Jaskela said the company has the capacity and the places to invest more capital. However, he noted that supply chain issues, inflation and labor shortages are challenging the entire industry in North America.

“If tomorrow we wanted to go out and add 10 platforms, that’s not going to happen. For us, we’re looking to add an incremental platform… so it’s quite manageable and allows us to grow,” Jaskela said.

“For the basin to show growth, the North American basin, is an exceptional challenge.”

Earlier this week, NuVista Energy raised its capital spending forecast for the year by more than 20% to around $365 million.

Earlier this month, Kelt Exploration increased its capital expenditure by 6%. Tourmaline Oil Corp. previously said it would increase spending by about $100 million to $1.23 billion due to inflation and a new exploration program for deposits.

ATB Capital Markets analyst Patrick O’Rourke noted that inflation for many producers was around 10-15%, which has increased spending in the sector.

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“Inflation is real, it’s in the system, and companies are doing their best to offset it with efficiency gains,” he said.

Total capital spending in Canada this year is expected to rise 20-30% from last year’s levels, added oil services analyst Tim Monachello of ATB Capital Markets.

The oil services sector has been decimated by a sharp decline in industry spending following the drop in energy prices in 2014 and the subsequent collapse of oil markets at the start of the pandemic.

The activity resumed this year. The Canadian Energy Contractors Association reports that 92 rigs were drilling in the country on Friday, up from 65 during the same period last year.

A new drilling forecast released by the association this week expects 6,900 oil and gas wells to be completed this year, up 7% from its November projection. The outlook foresees the creation of 2,500 additional jobs.

However, labor shortages will dampen activity for the rest of the year and global supply chain challenges will impact material availability, the association warned.

To attract more workers to the sector, the group has called on its members to increase the recommended minimum wage for various jobs on rigs by 9% (effective June 1) and 17% for jobs on rigs. service platforms, starting May 1.

“It’s about getting our workforce ready and starting to recruit,” said Mark Scholz, president of the energy contractors association.

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“We’re trying to signal to potential workers that we can both offer really competitive wages and… a line of sight to some stability in activity level.”

After several difficult years, a transition is taking place as many producers have the ability to pay down debt, return more money to shareholders and increase capital budgets while commodity prices remain high .

But will they be able to access the equipment and personnel to do so?

“I think there will be producers in the near term who will be disappointed,” said Dan Halyk, CEO of Total Energy Services, which operates drilling and service rigs in Canada and the United States.

“What the workforce needs is some certainty that this is stable and sustainable and oil at $105 certainly helps create that impression.

“Generally we see some success in bringing people back, but…you can’t just snap your fingers and magically make 100 more rigs appear ready, willing and able to work.”

Chris Varcoe is a columnist for the Calgary Herald.

[email protected]

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