Throwback Thursday: December 14, 1964

Oilweek, December 14, 1964

Drillers ‛cautiously optimistic’

Sharp increase in drilling costs and wider well spacing under new Alberta regulations have tightened competition among drillers and contributed to significant efficiency improvements.

Drilling contractors in western Canada are approaching the future with cautious optimism. They have suffered sizeable increases in all cost factors in the past year.

The outlook is clouded by uncertainty, related chiefly to the long term prospects for demand for their services. Yet competition is really creating greater efficiency. Contractors realize that the only way to maintain a reasonable profit is through increased productivity and performance. This is borne out by such big factors as greatly increased penetration rates and other technical improvements which have enabled contractors to drill in 1964 about the same footage as they did in the previous peak year 1956 with only 55 percent of the number of rigs. And, in spite of the apparent allurement of foreign lands, contractors agree fervently that, given the same general operating conditions, they prefer Canada over any overseas country as a place to do business.

These were some of the main conclusions of a round table discussion conducted by Oilweek with five prominent senior officers of contract drilling firms, in co-operation with Canadian Association of Oilwell Drilling Contractors, to get a penetrating analysis of the state of the drilling business, its achievements and its future. The panelists were: W. M. (Bill) Booth, president of Commonwealth Drilling Co. Ltd.; Jerry F. D’Arcy, president of Can-Tex Drilling & Exploration Ltd. and of CAODC; Jack L. Shearer, vice-president and manager of Rine Drilling Co. of Canada Ltd.; Robert E. Sparrow, vice-president of Peter Bawden Drilling (1964) Ltd.; and Frank J. Garnett, vice-president and general manager, Reading & Bates Drilling Co. Ltd. Here is the consensus on a wide range of subjects from the problems of reporting on tight holes to the potential of offshore drilling programs in Hudson Bay and the continental shelves.

Technical progress

It is hard to put a finger on any one outstanding achievement in technology in the past year, but significant prospects can be found in two items. One is the sealed bearing bit, which looks very promising as a cost-saving factor, but has still to be proven conclusively in field performance.

The other is the proposed drillpipe reclassification. This is a new and different approach to the basic method of classifying drillpipe. It adds to the established parameters of inspection, such as OD wear, corrosion, fatigue, etc., the factor of eccentricity, determined by instrumentation to measure variations in wall thickness. If adopted, this will reduce the risk of using pipe down to thinner wall tolerances before scrapping, and should result in certain savings in both capital investment and current expense. (A summary of an AAODC paper on this subject appears elsewhere in this issue.)

Five grades are provided in the new grading schedule, all the way from new pipe to scrap. A recommended maximum hook load is specified for each grade. It has been approved by AAODC and API and is to be considered by CAODC. It is hoped that it will soon be adopted in Canada. It is too early to say how much steel may be salvaged by its application, but U.S. experience with two strings indicated 450,000 feet of hole per string in non-corrosive and non-abrasive environment. It is believed that 600,000 feet is a reasonable target, although a figure like this would require a long steady program in good areas. Western Canada is particularly difficult, because of a great mixture of areas susceptible to hydrogen sulfide, other corrosive environments, abrasion, crooked hole conditions and other hazards.

Government taxation

Full impact of the new dominion sales tax legislation, applying the tax by stages to all items of drilling equipment and supplies, will be reached on Jan. 1, 1965, when the 11 percent scale comes into effect. When calculated on repair and replacement cost, the tax next year will add some six percent to total daily rig operating costs compared with the scale before the tax was applicable. The impact on total cost is significant because it applies to everything except labor which is about 30 percent of all costs. It also affects depreciation. If it is not taken into account when setting depreciation allowances, a contractor will find that equipment is being replaced out of capital to the extent that depreciation is deficient. The only hopeful feature is that the tax rate will probably not be increased in the near future, so that the higher scale will at least be stable for a while.

Customers have generally been co- operative. Adjustments were made on fixed-price contracts which were signed before the tax change but not completed until after.

State of the industry

There will still be an over-all surplus of drilling rigs during the winter peak period. There is always some spot area shortage of rigs because of sudden shifts of interest and development. Average rig utilization, however, is expected to be down to some extent from the 1963-64 level.

Vicious and prolonged bad weather in the north has been a very depressing factor all summer and fall. It has accentuated the normal spring slump and dragged this low level of activity right through the season when operations are normally at a moderate height.

The release of the new prorationing rules and wider spacing provisions helped to prolong this slack period. Some wells that were deferred because of the impossible ground conditions may not be drilled at all if operators can secure wide spacing orders. Many are waiting to see.

Offsetting this negative factor, however, is the trend already apparent for many companies to rush infill drilling programs min poorer areas where they think they can get a payout under present economic allowance scale before the May 1, 1969 deadline for full conversion to the new lower floor allowance.

At present there are 138 rigs working out of 310 available, but this is not a true reflection of the state of activity. It still marks the impact of the distressing summer weather, and the next few weeks are expected to bring a return to the high winter level usually experienced.

One panelist questioned the usefulness of the new proposed winter road along the Mackenzie River valley from Hay River to Inuvik for moving drilling rigs. He suggested that it will be of little practical value for current winter drilling, because all rigs slated for northwestern region operations are already there, shipped during the summer navigation season. Four rigs are in the region. He felt that they can be moved economical1y from point to point along the winter road, for short distances. But to travel the ‘hole’ distance is estimated to cost a minimum of $110,000 just for road tolls, a figure thought to be prohibitive, considering the additional cost of truck transport. At this time barging appears to be still the cheapest transport, and no operator is likely to make up its mind to drill a far northern well in such a hurry as to need winter transport.

Saskatchewan is a question mark, but there is some activity in deep wildcats. Several deep wells have been drilled since the new incentive regulations came out. There is a fair sized market and oil discovery at depth could spark a real boom. The present high level of activity appears reasonably assured for some time ahead. However, in spite of all the incentive, “you can’t change the Saskatchewan geology,” the panelists commented.

Offshore drilling

Nothing is foreseen in Canadian offshore drilling until at least 1966, but several programs may come up then and in 1967. It takes a year to construct offshore mobile platforms and some Canadian contractors will undoubtedly take the risk of ordering them. Special hazard: Canadian contractors on offshore work will be exposed to all the worldwide competition of existing offshore drilling contractors whose equipment is as mobile as tankers and can move anywhere in the world for a contract. This works both ways, however, as Canadian contractors with offshore rigs will be in a position to bid on offshore contracts abroad, such as in the hot North Sea area.

One encouraging factor is that world-wide sub-ocean drilling has sprung up so quickly in the past few years that demand for rigs exceeds supply at present. Also the value of each contract is high. There is some assurance of payout on the initial capital investment in any offshore rig, even though no firm supporting contracts are normally available on a long-term basis.

Foreign operations

There is no place in the world where a drilling contractor can be sure of putting a rig on location and not seeing another mast on the horizon. The basis of going foreign is certainly not a quick spot profit. It must be a long sustained operation which may be capable of paying out moving costs in four years or so. Some contractors feel they should earn at least 10 per cent more than on domestic drilling to justify the risk.

Expectations of higher profit margins on foreign operations have not who can keep all rigs working in Canada, or even a substantial proportion, has nothing to gain by going overseas. Counting the high cost of positioning a rig abroad and the high cost of returning it, there must be a reasonable assurance of a sustained level of work. The only satisfactory approach is to look on foreign operations as a permanent extension.

The best foreign areas at present seem to be Australia and Alaska. In Australia the normal risks apply and there is a moderate surplus of rigs. The risk of inflation is always a factor. To it can be added a fairly high political risk anywhere outside North America and the Commonwealth.

In general the earning power of drilling contractors is not steady or sustained enough to attract enthusiastic public participation, whether they are operating mostly in Canada or abroad. It is a high risk business without a bonanza return. Some contractors term it “a high risk enterprise for a utility return.”

Operating factors

Steady improvement in drilling efficiency has been maintained, in spite of high labor turnover due to the erratic work level Main causes appear to be better knowledge of the sedimentary basin and improved techniques. More experience has led to faster drilling. Operators have helped by modifying deviation clauses, by allowing deeper drilling with clear water before going to mud, and by better appreciation of what is hazardous. Crews are better trained in technical knowledge of such items as hydraulics, mud control and general drilling practices.

Training programs have been extended and improved. Tremendous strides have been made by CAODC through collaboration with Petroleum Industry Training Service. This is part of every member contractor’s program. An accumulation of small improvements, without any spectacular advances in technology, has been noticeable. It has been responsible for much of the cumulative improvements in overall drilling efficiency. Service companies and manufacturers can also claim credit for improving their services and products.

Effects of high turnover of crews is combated by an increasing trend towards keeping senior personnel on the payroll with guaranteed annual sala1y and pension plans. They are then available to give a quick education to green hands when business picks up in the heavy season. It is not easy to attract qualified young men, because of the lack of continuity, but CAODC is making an effort to encourage more recruiting through education and public relations work.

Costs loom large in all operations and forecasts. They crop up in every phase of drilling. A new rotary table that was priced at $4,200 in 1956 costs $7,400 for the identical model in 1964. Even counting the impact of the sales tax and the  moderate decline in value of the dollar, this is a big advance. Equipment design doesn’t advance accordingly, but this is not the manufacturer’s fault. There is not a big enough market to support frequent improvements in design. During the past few years, too, used equipment has been freely available. In the past six years 600 rigs were auctioned for breakup in the U.S. and this pushed a big volume of used equipment onto the market. It had its effect in Canada as well. There are some signs that this is coming to an end.

Economy is reflected in fishing jobs. The two biggest causes of fishing jobs are drill collar failures and stuck pipe. Increase in penetration rates, in the interest of lower costs, creates some additional risk of fishing jobs. An opposing factor, however, is improved crew training, along with better deviation control. Another good way to cut fishing time will be to implement the new drillpipe grading schedule and adhere to it.

Progress is being made continually in cutting down on paper work. The standard CAODC daily tour report form has been successful. The Alberta conservation board has cooperated in accepting this form.

Inventories and rentals

All contractors try to avoid having excess capital tied up in inventory. This can take two forms: supply stock and working equipment. The general rule is to leave supplies on the store shelves as long as possible. But in remote locations the best method is to get everything in at the start to avoid possible high cost of shipping an emergency item later. The only real hazard is the risk of deterioration or damage through attrition by time and wear and tear. In far northern locations it is possible to get stuck with carrying as much as $30,000 worth of supplies over the summer shutdown, but this does not happen often.

Maintenance costs are essentially higher in wilderness locations. There is an obsolescence factor and sometimes an item held over the summer may not be returnable to the supply store because it is no longer current stock. Perishables are being handled on a bulk basis. One company recently shipped a whole freezer van load of food by water to a remote location.

Rental of big equipment items and vehicles does not follow any standard pattern. The attitude towards vehicles runs all the way from complete ownership through complete rental to basic ownership with supplemental rental for peak operations. The main reference point is continuity of use, but all contractors don’t agree that ownership can be justified even on this basis.

Rentals are readily available on big special items such as large drill collars which most contractors feel they can’t afford to keep in stock. When it comes to a fleet of cars, the big point to consider is how much capital is going to be tied up by owning which could be used better as working capital Contractors figure it is two to three percent more expensive to rent (in terms of interest charged on the investment), but this may be less costly than having to borrow the equivalent amount of working capital. Renting provides good flexibility and sharper accounting for vehicle costs. But it is largely an individual matter, depending to a great extent on internal factors.

Akin to this is the maintenance of swing crews. “It is desirable if you can do it,” the panelists said, but it is a function of available labor and remoteness of location. Most drilling personnel are reluctant to accept a swing job if there is steady shift work available. Because of wide variations in activity, crews are anxious to maximize their working periods and management finds that the use of swing crews tends to impair this objective.

There is a chronic shortage of well qualified men anyway. A firm with fewer than six rigs finds it almost impossible to implement a system of swing crews.

Relations with operators

Client attitudes are generally cooperative. Most contractors get along fine under the firm footage contract. In turn, trucking subcontractors on moving jobs are usually co-operative too, provided ground conditions are reasonable at all. There have been some real problems this past summer with access in rain-saturated regions. Operators always do provide access although it is not always of the best, but this is often not the fault of the operator.

The biggest problem for both drillers and truckers is that operators will often ask for a bid on a specific location on a firm price basis, before survey of the site or construction of the access road, and sometimes the location is much less accessible when the rig is to move in. The greatest help an operator can give is to adjust its requirements to ground conditions. “There is no location you can’t physically get into, at a price,” but pushing into an “impossible” site is costly for operator, contractor, and mover alike.

Complete uniformity in blowout preventer hookups is not considered feasible. Contractors take the realistic attitude that the operator has the most to lose by a blowout In any case, hookups tend to be standardized as to operators, so a contractor gets familiar with the operator’s plan regardless of area. BOP equipment has been much upgraded in the last seven years, with increased safety factors, and operators are more accommodating in their interpretations.

The tight hole problem

One really big problem, and a cause for serious concern to contractors, is the increasing number of wells being drilled tight for land sales on footage rates. The operators are so competitive that they insist on keeping everything completely confidential; even the drilling contractor’s head office may not receive drilling reports until after completion.

This has raised all sorts of troublesome and costly problems of failing to detect deficiencies in the drilling schedule. In known cases, there has been a delay of as much as five or six days in the projected drilling time because the depth reports were not available to check on progress and adjust problems. Loss of control in this way can run away with all the profit margin on a job.

Contractors feel that there must be agreement with operators as to what constitutes reasonable security on a tight hole. The real crux of the case is: how important is the “withholding of drilling data for security,” when the information is critical to the drilling contractor. Depth, mud condition, and rock bit condition are all vital factors for the contractor and may not actually affect the security of the tight hole status. This will probably be a subject for serious discussion in the near future.

The problem is becoming very widespread as the pace and size of land sales accelerate. Contractors consider it one of their most urgent concerns and one that can cause chaos if it is allowed to spread unchecked.