Big improvements in efficiency aren’t helping Canada’s drillers: GMP FirstEnergy

Contract drillers continue to drill more metres per day, but their day rates continue to decline.

The average rate of penetration in the Western Canadian Sedimentary Basin has climbed to 269 metres per day in 2017, representing a 19 per cent increase from the prior year and a leap of 37 per cent from 2014, according to GMP First Energy.

“If 2014 were to be repeated from an activity standpoint, only 267 rigs would be required at the current efficiency and average well depth whereas, in 2014, there were 359 rigs required,” said the energy investment bank in a research note.

In certain plays, drillers have made step-change efficiency improvements. Metres drilled per day in the Duvernay, for example, have more than doubled, to 308 metres per day in 2017 versus 153 metres per day in 2014.

“In most cases, we would expect a commensurate increase in revenue per operating day as drillers are reducing drilling times and should, therefore, earn more to compensate for improved performance. This has not been the case,” GMP First Energy said.

The average day rate in Western Canada has actually declined by 25 per cent from $26,698 in 2014 to an estimated $19,555 in 2017, according to analysts.

On the surface, better drilling efficiencies and lower day rates might seem like a good thing for western Canada’s oil and gas producers because cutting costs is essential to keeping stride with global competition.

But drilling efficiencies aren’t a geographic competitive advantage because drillers can take those advantages everywhere.

Better drilling efficiencies in Canada means better efficiencies in the U.S., which allows producers to continue working at lower commodity prices. And that brings more oil and gas to market which, in the absence global demand growth or supply cuts (such as production outages or OPEC cuts), pushes oil and gas prices even lower.

Meanwhile, drillers with the best rigs and the best crews that can drill the fastest will be rewarded by winning work.

“Operationally, drillers have done an outstanding job creating efficiencies for their customers, but they have been unable to translate this into higher rates of return for their shareholders,” GMP First Energy said.

The investment bank also sees the potential for “further significant” asset retirement of rigs that aren’t able to find work or generate the necessary returns, for example, shallow rigs and less-capable deep rigs.

“It has become increasingly important to have a fleet of [highly efficient] deep capacity rigs.”

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