Dizzying oil prices are pushing some Alberta oil services companies to the limit, but it’s spelling only marginal benefits to the sector, industry insiders say.

With oil in the $55 range, “we’re operating at full capacity, subject to the weather conditions,” says Brian Banks, vice-president of Nisku-based Jade Drilling Inc. “It’s been like this since the spring. There’s been a lot of pressure to keep very active by our clients because of the high price of oil and gas.”

Jade, one of the service industry’s smaller companies with 250 people, built a new rig this summer due to growing demand fuelled by surging commodity prices.

However, while the Canadian marketplace for oilfield services is the world’s second largest – the U.S. is first – the sector’s biggest limiting factor continues to be the availability of skilled labour.

File photo by Larry MacDougal, Business Edge
PSAC president Roger Soucy says sector is operating at full tilt.

“We couldn’t expect to do a whole lot more drilling than what we’re doing now because there aren’t the people to do it,” says Roger Soucy, head of the Calgary-based Petroleum Services Association of Canada (PSAC).

PSAC represents the upstream petroleum field’s service, supply and manufacturing companies.

Soucy says many businesses would likely be doing a similar amount of activity if oil was still in the $30 US-a-barrel range as opposed to its current level of more than $50. But even with sky-high oil prices, there are only so many more wells that can be drilled, he adds.

“We’re going full out now. I don’t know how much more we can grow,” says Soucy of the boom in the price of crude.

“Realistically, I don’t think there’s a whole lot more we can do.”

As to profits or any bonanza being realized by service companies from high crude prices, Soucy said it’s all relative.

“Certainly their bottom lines are better, but it doesn’t compare to the bottom lines of the oil companies (that take more risks).”

There’s another advantage to high prices – quick action, adds Don Herring, president of the Canadian Association of Oilwell Drilling Contractors (CAODC), which operates out of Calgary.

“On the service rig side, if you’re looking at these high commodity prices, the producer has a very strong incentive to see that if any wells aren’t maintaining their production profile – because they require repair or some other stimulation – they’d have a direct incentive to undertake that work because they’ll reap the high cash flow immediately,” says Herring.

Jade Drilling’s Brian Banks says it’s not just the price of oil that’s driving business.

“I think the whole industry has fallen behind due to weather in the second and third quarters that was too damp for field work,” he says. “There is real pressure to finish before winter programs start up. It’s both pent-up demand – people expected to have some of their wells drilled by now – and we’re seeing that the winter (demand) is going to be very strong.”

But a strong commodity market can be a mixed blessing, says Bruce Jones, president and CEO of Calgary-based Seamans Drilling Ltd.

“When I wake up in the morning and I see the high price of oil, I have a reaction that’s euphoric but it’s also terrifying,” he admits.

“It’s euphoric because all of our equipment will be working, but if there’s a correction we have an oversupply of services in the industry.”

Jones worries that record high prices could translate into faulty economics for justifying new projects that saturate the sector by bringing on too much equipment.

“It’s a commodity market. We wake up in the morning and see what they do,” he says. “High commodity prices have a tendency to bring in some silly money – people who are going after short-term opportunities. But if demand drops off, it makes it very difficult for the oil and gas services sector because it can’t be sustained.”

If projects are pushed through on the basis of poor economics, there’s less of a barrier for companies to enter the sector, he says. “Then when there’s a correction, we have an excess of equipment that eats into margin quickly. What we need is appropriate pricing to sustain activity.”

But living with volatility is a fact of life in the oilfield services sector, says Banks.

“We’re never going to see a stable price,” he predicts. “It’s a commodity. You have to plan for instability and I believe our industry does that.”

Jones, also a proponent of conservative planning, says even playing it safe is no guarantee in a feast-or-famine industry.

“We’re operating full out. Today we can not meet our client needs,” he says. “We’re adding capacity as we speak, about 30 per cent. Typically we take a fairly conservative approach to growth but it doesn’t matter how conservative the approach is, when demand drops off margins are impacted.”

While CAODC’s Herring points out that high oil prices, along with high gas prices, have been helpful to association members by translating into stronger cash-flow numbers, he stresses that it is just as important that industry believes these new benchmarks are genuine.

“What’s important from our side is that the investor has to believe that the oil prices are real – not only today but looking forward for two, three and four years, perhaps even longer,” he says.

“High prices are good for the industry, but you don’t invest on today’s high commodity price. You invest on what you believe the price will be going forward.”

(Laura Severs can be reached at laura@businessedge.ca)