Letters to the Editor can be sent to brian.zinchuk@pipelineonline.ca
There’s not a lot of drilling happening around Torquay these days. A few years ago, there was over a half dozen rigs working in an area not much larger than a township. Photo by Brian Zinchuk
Dear Editor:
Regarding last week’s columns Brian Zinchuk: With oil prices now at US$94 per barrel, why is industry activity akin to when it was half that? and Brian Zinchuk: Some suggestions for the Saskatchewan government to stimulate activity in the province’s oilpatch:
I read your articles regularly and with interest as I have been involved in the Saskatchewan oilpatch for the last 27 years, finding oil and building and selling small private companies. I think all your points about industry activity levels and how the provincial government can help are correct and appropriate. We should encourage them as much as possible.
I would like to add a couple more thoughts as to why activity levels are so low.
First is economics and investment rates of return.
WTI at $90/bbl today is approximately WTI $67/bbl on an inflation adjusted basis. Ninety dollars per barrel sounds high and given that costs have increased at similar inflation rates the economics of payout, rates of return, return on investment are no different today than back when oil was $67/bbl. Incidentally the average inflated oil price between 2000 to 2020 was $74.54/bbl and we have a ways to go to get to that level which would be $100/bbl in 2023 dollars.
To put that in perspective the highest-ever average inflated oil price was $99/bbl in 2008 which would be about $129/bbl today. Activity levels in Saskatchewan were much higher when oil prices were in the then equivalent of $100/bbl to $120/bbl in today’s dollars. Crescent Point (CPG), for example, exited Mississippian and Bakken drilling in favour of plays with more growth potential and better economic returns. Whitecap is the new CPG, albeit at lower activity levels, and essentially uses their Saskatchewan production as the cash cow to fund other drilling activity in the Montney liquids rich plays in Alberta also with enhanced economics and enormous numbers of low risk drilling locations.
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Second is a lack of capital investment in the energy industry that would drive activity in Saskatchewan, compared to investment in the late 90’s though mid 2010’s.
Institutional and private interest in oil and gas equity investment is near zero, unless you are a large public company. Even then, most funds raised are through debenture type debt instruments. For our private company, equity investment is currently non existent and bank debt unavailable. We started with about $2 million raised from family, friends and business associates, as they say. We have drilled only five wells since 2019 because we live on cash flow and are forced to proceed slowly and cautiously and have to let funds accumulate and build up for each well we drill or participate in. In prior companies with more equity available we would have drilled 30 to 40 wells in the five year period we have been active. This year we will participate in one well this fall and drill another in the first quarter next year, and possibly more after that depending on production results. I suspect many small companies are in a similar financially constrained position.
The lack of equity funds is due to the uncertainty in investment conditions and outlook for the energy industry in Western Canada generally, which of course impacts Saskatchewan. This is directly due to the current federal government policies. I speak to colleagues in the US and UK who express disbelief that Canada will not build pipelines internally, prefer to import Middle East oil, banned tankers on the West Coast and are actively discouraging domestic oil production. The refrain I hear is ‘Who would want to invest in Canada? What you are doing makes no sense.’
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This is even though we have the ‘cleanest’ industry in the world due to high standards of emission regulations and operating practices. Canada should be a highly desirable place to invest even when oil prices are modest as today, but is regarded as too risky due to uncertainty.
The current provincial government and the Ministry of Energy and Resources is more helpful than ever in encouraging and promoting business activity, despite regulatory creep which is real, and are not responsible for the current malaise. The blame for lack of activity lies firmly at the feet of the federal Liberal Party and their policies punitive to the energy industry that are responsible for discouraging investment. It is seemingly their goal.
I am the COO of a 50 bbl/d, small private company solely active in southeast Saskatchewan that employs local services and consultants to conduct field and operating activities. We have lands with development drilling locations held by production and other land. We would like to drill to prove new reserves though we have to be patient, work with cash flow and drill when we can. It is a shame as had we been able to access more equity we would have drilled a lot more wells by now and hence the lack of our activity.
Cheers,
Tobin Webb,
Calgary
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