Operators in Canada’s slowly recovering oil and gas industry have made great strides improving their efficiency and productivity, but a new report from Sproule says that some of the strategies being implemented may not position them well for the long term.
Since the oil price collapse in 2014, companies have “made some painful adjustments and are now leaner, more innovative and competitive,” says Sproule vice-president Steven Golko.
A “relentless focus on operational efficiency, portfolio optimization and value-driven investment decisions” has led to more consolidation and focus on plays with steady cash flow generation, particularly in the liquids-rich Montney and Duvernay.
The Canadian industry is delivering year-over-year productivity improvements based on enhanced production and completion techniques, Sproule says.
“Many operators in the Montney are testing the limits on well length, inter-well spacing, pad design and completions. Typical completion stages today range from the low 20s up to 75 or more. The larger companies are focusing on two-mile-plus drills and the smaller players are catching up,” says Jason Robottom, manager, reserves classification.
There are fewer smaller players, however, and those that remain are having a difficult time accessing money to grow.
“The Alberta Securities Commission’s 2017 oil and gas review clearly shows a decline in the number of junior companies reporting, from 210 companies in 2014 to 129 companies in 2016 – a decrease of 39 percent,” says Doug McNichol, Sproule’s senior manager, engineering.
“The biggest problem holding back the small players is tight access to capital. The recovery in oil and gas stock prices is lagging oil prices and the overall stock market, and companies are struggling to secure limited investment dollars.”
It’s understandable that the continued focus on cost management and cash flow is driving specialization and consolidation, Sproule says, but these trends may cause problems in the long term.
“Sproule believes companies need to take a more balanced approach that includes different products and short, mid and long-term opportunities…Long-term growth requires a diversified portfolio,” says senior vice-president Nora Stewart.
And while consolidation can create a strong mid-tier market that drives activity in higher cost or higher risk areas, it detracts from a diverse market with a full spectrum of companies playing different roles across the asset life cycle, Sproule says.
“This is part of what has made North America the largest and most liberalized oil and gas market in the world in subject matter expertise and capital deployment.
“For now, however, many companies have no choice. Making progress in today’s market requires specialization and consolidation.”