Digging Deeper

By David Yager, President, Yager Management Ltd.

In the four years since oil prices collapsed, drilling and service rig operators have examined every single internal cost in pursuit of a sustainable business model in a highly competitive business environment. The objective is to maximize cash flow and profitability without compromising service, safety or operational performance.

The challenges are significant.

Major capital investments in new generation equipment to meet client and market demands were made in stronger markets. Today’s operating margins have pushed a return on invested capital further into a future that remains increasingly uncertain. The drilling and well servicing industry has invested in excess of $10 billion this decade alone in new and advanced equipment. Profits have been elusive or non-existent for the fourth consecutive year. There is no improvement on the horizon for 2019.

The contraction and cyclicality of activity has made attracting, training and retaining the skilled personnel the job demands more challenging than ever. Rig operators have concluded their industry may have some of the highest – if not the highest – costs for worker recruitment, training and retention of any major business sector in western Canada. The cost to recruit and train new personnel is significant while the promise of stable employment remains elusive. This revolving door of workers has nothing but downside for all stakeholders from clients to those who do the job.

In the face of what now looks like the fifth consecutive year of a challenging business environment, the demands to do more with less from clients and regulators continues. Having cut internal operating costs to the maximum, rig operators agreed it was time to look outside their business for ways to make their essential industry more sustainable. Earlier this year the CAODC struck a Regulatory Reduction Task force to look at what could be done about external cost pressures that fail a reasonable cost/benefit analysis.

There were three main areas identified: health and safety compliance, transportation, and taxation.

The health and safety expense envelope was expanded to include all human resource costs plus requirements for expenditure on routine certification. The recent volatile cyclicality of the business has significantly increased the cost of even finding enough workers to protect and retain. Once hired, client demands for more training for even short-term entry level positions continues to grow.Compared to other markets, industry standards for equipment recertification in Canada were the most demanding in the world. Meanwhile, the Alberta government has undertaken new labor and worker protection regulations that will increase payroll costs.

At the same time,rig operators are justifiably proud of their contribution to the protection of workers to the point that the upstream oil and gas industry is the safest in Alberta compared to all other major industry sectors using three major metrics;lost time accidents, disabling injury claim rate and disabling injury frequency.At what point does this industry get the credit it deserves for its outstanding safety record? Why are there continuing demands to improve the best safety record in the province, while no other industries are under similar pressure?

On transportation, service rig operators are still treated as “common carriers” under highway transportation regulations even though service rigs are off-road equipment. A common carrier is a trucking company that hauls goods for third parties for a living. All service rigs haul is themselves. This requires drivers to fill out driver’slogs on a regular basis. One service operator had a rig that had never left a client’s field or driven on a main road for eight years. The law still required this rig to fill out highway driver logs every day.

Another expense is the unpredictable fees municipalities charge service rigs to use secondary roads. These permits vary considerably by municipality, many of which have determined service rigs are yet another way to extract more tax revenue from the oil industry. Most service rigs spend less than 5% of their operating hours on the road. In the current market this is lower yet because unless the rig is close to the work it doesn’t work.

All service rig operators want is for their equipment to be classified as “off road” like agricultural equipment because that is where they earn their money. The simple recognition that service rigs are a unique class of off-road assets, not a trucking company,would relieve service rigs operators and their clients from a large expense without jeopardizing public safety.

The last area is taxation. Particularly vexing to service rig operators is why they are not permitted to used tax-exempt “marked” fuel like the agricultural industry, or why their customers are exempt from paying carbon taxes on fuel for their operations while their service providers are not. Rig operators have been subjected to higher corporate tax rates introduced by Alberta and Ottawa at the same time the business environment has made it difficult if not impossible to be profitable. The CAODC concluded there are many ways in which the drilling and service rig business could become more financially sustainable without in anyway compromising safety or performance. Other industries have been able to ask for and receive support from clients and regulators when it is clear their situation deserves it. The CAODC Regulatory Reduction Task force has concluded that for rig operators, that time is now.