Why Canada's Petroleum Service Firms Are Moving Into The U.S.

Like many of its service peers, Stealth Acoustical & Emission Control Inc. is shifting assets and marketing toward the United States. "Shop and field personnel are readily available in Colorado. Wages, office and shop facilities, and most other operating expenses are 25% to 50% less expensive than Calgary," says Colin Davison (shown here), founder of the two-year-old firm. "The Americans are expanding their natural gas production and building infrastructure. Alberta producers are moving their capital to the U.S. Take it all together and there are obvious advantages for us in heading south."

Frank Tirpak, president and CEO of Lonkar Services Ltd., says the Red Deer-based slickline/wireline firm presently does five percent of its business in the U.S. Over the next five years, Lonkar plans to expand aggressively into that market. Tirpak, who also chairs the Petroleum Services Association of Canada (PSAC), adds that many service companies will deploy their best equipment south of the border. "Whenever you're out to win new customers, it's an advantage to put your best foot forward," he comments. "I'm concerned that the Canadian industry will find itself left with mostly older, less efficient technology."

Many service firms began weighing U.S. expansion two to three years ago, PSAC president Roger Soucy says. The thrust came from major unconventional gas successes in the Rocky Mountains and the Barnett Shale of Texas. "Until then, American exploration tended to focus on the Gulf of Mexico, and offshore work is of limited interest to most Canadian service companies. It's a different story with land-based activity, and the presence of Canadian producers in the Rockies and Texas enhances the appeal of those regions," Soucy explains.

Over the past year or so, another factor has come increasingly into play: Drilling activity has declined in Alberta and the short-term probability of an upturn is far from promising. Nickle's Rig Locator tallied 471 drilling rigs active in Western Canada on December 14. In 2006, 510 rigs were at work at that date, in 2005 683. PSAC is concerned that Canadian activity may plunge even further by the second quarter of 2008. "Service companies who hadn't previously examined the U.S. are certainly evaluating their opportunities there now," Soucy says.

American upstream activity continues to be strong. Baker Hughes reported 1,734 active land rigs in the U.S. as of December 14, up from 1,610 a year earlier. International drilling is also holding up well. Baker Hughes counted 992 active rigs outside North America in November, an increase from 939 one year previously.

Sheldon Jasper, a senior manager with Central Alberta Well Services Inc., says the company is preparing moves into the U.S. and Russia. "The Siberian situation is comparable to Alberta four years ago. They urgently require both modern equipment and skilled people," Jasper notes. Central Alberta Well is negotiating an alliance with a Russian counterpart, Siberian Service Corp. If all goes well, the Red Deer-based company will keep some of its skilled personnel busy overseas for several years, then repatriate them after Russian replacements have been trained. "By that point, Western Canadian activity may have recovered," Jasper says.

Tirpak, on the other hand, fears that Western Canada's decline in natural gas drilling may prove longer-lived. The PSAC chairman bases his analysis on a handful of critical factors:

• A far stronger Canadian dollar has greatly enhanced the comparative appeal of American drilling prospects for investors, including Canadian producers.
• The ongoing expansion of LNG (liquid natural gas) import facilities along the U.S. Gulf Coast "means we may not see North American gas prices at the levels of 2005-2006 for the foreseeable future," Tirpak cautions.
• In exploration terms, the Western Canadian Sedimentary Basin is geologically mature, with the average discovery size continuing to drop.
• Due to ongoing oilsands expansion, skilled labour remains tight in Alberta.
• In late October, the Alberta government announced an overall hike in its natural gas royalty rates. By kicking the conventional industry amid a visible downturn, Tirpak suggests that the province reversed its historical sympathy toward the oil and gas business. In his view, investors will not soon forget that attitude.

Whether times are good or bad for conventional producers in Alberta, Davison believes that the lack of available labour remains a pivotal factor in this market. Stealth designs, manufactures, assembles and installs emission control and power generation systems. This spring, the Calgary company plans to open a new manufacturing facility in Colorado. "Hourly rates in Denver for shop and field tradesmen are $15 an hour," its boss says. "In Alberta, that figure is about $30. We can hire an American engineer for less than a draftsman earns in Calgary."

Worse, Canada's demographics mean the shortage of young workers will continue to get tighter, and job-holders will have the market power to be choosier than ever. "Who wants to freeze his butt off in the bush cutting sheet metal when he can make just as much money doing something more comfortable?" Davison queries. "Our designers are enabling us to do more and more of the work in the shop rather than in the field. We will perform as much of that shop work as possible in the U.S. simply because we need all of the people we can get in Alberta for field installations." Besides enhancing its Canadian operation, Stealth's American expansion also offers the opportunity to diversify its customer base south of the 49^th parallel.

The work force is also very much on the mind of Roger Soucy. Although some service job losses have already occurred, the PSAC president hopes that major layoffs can be avoided through the relatively busy winter drilling season. After spring breakup, the situation is more difficult to predict. If the downsizing requirement is not too intense, normal attrition (which runs into double digits annually for the service sector) may be sufficient to address the bulk of the lost employment. However, in the event that oil and gas field activity slackens drastically, deep and painful cuts would occur.

If a job loss debacle does develop among service providers in 2008, PSAC thinks the exploration and development sector's credibility as employers will be left in shreds. After all, the upstream industry spent the past few years advertising itself nationally as a stable provider of well-paid careers. If its present hands are forced to work overseas or migrate into oilsands-related jobs, Soucy wonders who will sign up in future when the call goes out again for more oilfield technicians.