By Brian Crossman
When I talk to the fellas who have been working in the oil patch for a long time, the conversation inevitably gets around to why it is so difficult to operate nowadays when 30 to 40 years ago, anyone with a few dollars, some ambition (and a big pair of…) could start and build a small oil company.
It’s easy to point out the many reasons why this isn’t possible, or is at least more difficult today. But does it have to be? The industry has been inundated with amazing new technologies over the past 20 years. We can drill wells faster, safer, and more efficiently. Likewise with flow lines and facilities. There are fewer surprises in the zones as most have been investigated and exploited many times over. We know where the oil is and how to get it. Water and CO2 flooding has increased reservoir pressures and lifespan.
So why do we need $60/bbl WTI to be profitable? Some guys will tell you they need $80, or more (we’ll sure take $80/bbl!) With all the new technology, both computer and mechanical, we should be profitable at less than $40. One can argue that drilling and completion costs have gone up (largely due to better wages and equipment) but that is only a short point in the life of a producing oil well. Day to day cash is spent on electricity and operating costs, so what are the rest of the expenses? Let’s have a look, shall we?
Drilling and Completion
In the beginning, there is a field with nothing but grass or a farmer’s crop on it. Before that, the rights to drill must be secured, the land acquired, and the potential for a profitable oil play researched. Then the leased land is staked out, the earth work is done, and the drilling rig moved on to location. The well is drilled, casing set and cemented in. Then it is drilled into the zone, be it conventional or horizontal. Once drilled, the rig is skidded off (then possibly a frack) and the service rig is moved on for completion. This takes 2 days or more depending on depth and the complexity of the completion. Typically the production equipment is run in the well, with possibly a clean-out first. Very simple and inexpensive.
So where do these reduced costs come from? Drilling and service companies are pretty much at the end of the line in cutting costs. The equipment needs continuous maintenance throughout its life cycle, and needs to be re-certified every 24,000 working hours. This expense is in the hundreds of thousands of dollars all at once, and that iron needs to be working at a profit to recover those costs. Blow-out preventers and overhead equipment has to go in for re-certification more often than that. All the heavy trucks must have safety inspections performed on them by qualified professionals. Could we lower the wages? This is a proven way to push experienced workers to other less-strenuous careers, and will guarantee a lack of young people wanting to enter into the oil patch. Retention and recruitment would suffer even more than it already has.
Over the lifespan of an oil well, there is regular maintenance, just like your home or vehicle. Oil and grease for the pumpjack, rubber packings to prevent leaks, drive belts, valves and fittings that corrode and wear out, vegetation control, and more. And that is just on the surface. Downhole there is rod and tubing wear, bottom hole pump failure, sand and wax issues. All of this requires specialized equipment, service rigs, rod rigs, tank trucks, picker trucks, hotshot trucks, and more. There are also chemical programs which are, in truth, more preventative maintenance to hopefully improve run time and result in less repair work downhole.
Without all this, the well at some point will lose efficiency and eventually will cease to produce until repaired properly. Or maybe the production has declined to the point that a different lift system must be installed. These, of course, cost money and must be calculated into the life of the well as a fixed cost. As with all things, the better you drill and maintain your oil well, these fixed costs should be easily managed.
Where does this leave us? What costs are making the industry inoperable at current oil prices? Well for starters, in Saskatchewan the power bill is as much as 30 per cent of the operating costs for most operators. This needs to be given some attention. Small flare-gas turbines to create power are a start. I am told SaskPower is adverse to such ideas. Another issue is the cost of red tape. There are many forms of this, but I have been told by many colleagues that between the time wasted (time is money) and the various fees, the system is very redundant, and needs to be streamlined. We must be a well-run industry, by creating more efficiencies from both the operator and regulator perspectives.
This is where we need to pull together as an industry. We have some great people at the helm of groups such as CAPP, CAODC, PSAC, and others that represent various stakeholders in the industry. It is high time we set aside our differences and all “pull in the same direction” and become more efficient together.
By being a more efficient industry, we will be well-positioned for the future. This is imperative. Shutting down an entire industry overnight for the desire to turn “green” is shortsighted and will do nothing to change the carbon emissions on the planet. But buying Canadian oil and gas at home instead of foreign product will achieve several short and long term goals. First and foremost, we continue to create skilled jobs for Canadians in the energy sector. These can continue to create job security for First Nations and new Canadians, giving them opportunities to raise their families. By selling fossil fuel products at home and abroad, there will be resources available to finance future energy solutions. Our industry is over 10 per cent of GDP, ($321 billion) and citizens from across Canada need to be aware of this. Our industry will continue to fund Canadian interests, not the interests of a Saudi oil sheik.
We can continue to be the safest, cleanest, most ethical oil and gas producer on the planet. The multiple streams of tax revenue can and will be used to improve healthcare, infrastructure, and living conditions for all Canadians. Oil and gas producers will continue to donate to recreation facilities, hospitals, STARS, and many others that make our communities stronger and safer.
Here’s a thought: How about a portion of the tax revenues from Canada using and selling our product goes toward the future? (No, not a “carbon tax” added on, but a portion of the regular tax). What if the money was used to develop long-term, sustainable solutions to power the world in the coming centuries? Instead of using the four-year election cycle to dictate who is going to finance windmills and solar panels (a very short-term non-sustainable solution), we need to focus on what will check all the boxes of the future. Safe. Sustainable. Efficient. Cost-effective. Clean. That’s it. Let’s demonstrate to our political leaders that we need their support, and more importantly, they need ours. A long-term plan to create long-term solutions is needed. We don’t want to continue to bury windmill blades in the ground when they reach the end of a very short life-span. None of us want to see huge piles of non-recyclable “green energy initiatives” in the future for our grandkids to deal with.
So what is that future? Geothermal? Nuclear energy? Cold fusion? A technology yet to be discovered? I’m no scientist, but I believe it’s more than just possible, it’s guaranteed. But only if we work with the existing resources we have, to put our country and the planet in a position to make it happen. We need profitable businesses that will continue to create a tax base to finance the future. This needs to be implemented by qualified people, not a friend of an elected official who just happened to start a solar panel company. I know I sound very simplistic when I describe it like this, but it really is. Cut costs, be efficient, and do not burden the average citizen with a ridiculous cost of living.
The bottom line is we need to let our energy industry flourish so we can create revenue streams to solve the problems we face. We in the industry must do our part by operating a cost-effective, clean, safe, and efficient oil patch. Our governments need to support the industry, mostly by staying out of our way. If our leaders continue to suppress Canada’s energy industry, we will become poor, and unable to control our country’s destiny. Canada will be unable to lead the world in solving the energy problems of the future. And a Saudi oil sheik buys another gold-plated Mercedes. We can do better. We will do better. I guarantee it.
Thanks for listening.
Brian is a partner in Independent Well Servicing where he looks after field supervision and marketing. IWS is based in Estevan, Saskatchewan.