Drilling and Service Rig Fabrication

Written by Godfrey Budd Tuesday, 20 December 2011 00:00

Could the best year ever be just around the corner for this Alberta industry?

Alberta’s rig manufacturing sector was no exception to the steep downturn in fabrication activity that followed in the wake of the global credit crunch in the fall of 2008. But a healthy recovery that began for much of the sector in the first half of 2010 is showing no signs of slowing. Strong world oil prices in the $100-per-barrel range are widely regarded as a pivotal factor in sustaining the recovery and spurring continued growth.

Despite price competition from Asia, the province’s rig manufacturers have a reputation for quality and this has doubtless contributed to the recent growth in international demand for rigs and other oil field equipment made in Alberta. The quality stems in part from the fact that, for many years, servicing the local market in western Canada was the bread and butter for many Alberta-based rig manufacturers. And that meant building rigs that could hold up well in some of the harshest environments in the world.

Thanks to the overseas demand for rigs made in the province, one rig manufacturer saw an upswing in activity well before 2010. “We began growing in January 2009, when we were at 14 people, then grew to 50 by July 2009. That’s because of contracts we were awarded in South America—in Colombia, Ecuador and Peru,” says David Leonard, president of CARE Industries Inc.

He says contracts helped offset the effects of the recession that lasted throughout 2009 across the sector.

In the 2009-10 period, overseas orders accounted for about 80 per cent of revenue for the Red Deer–based firm, which builds drilling and service rigs and other oilfield equipment. That ratio has changed over the last year or so and revenue now stems from a 50/50 split between Canadian and international orders.

SEEING AN UPSIDE

“Drilling activity has picked up significantly and that has translated into orders. Companies are now seeing a long-term upside to drilling, mostly for oil,” Leonard says.

A busier western Canadian oilpatch typically boosts demand for both drilling and work-over rig services.

With oil prices remaining strong, oil companies are applying the new horizontal drilling and multistage fracking technologies that have matured in the last decade to revisit and produce more oil from pools of oil in Alberta, which had first been drilled decades ago, but with traditional vertical drilling techniques. This has spurred demand for rigs designed for pad drilling, where four, six or even eight horizontal wells are drilled from a single lease. When a well has been drilled, a specially equipped drilling rig moves a few metres into position on a drilling pad to drill the next well.

“There’s been a lot of investing recently in pad rigs,” says Gordon McCormack, president and chief executive officer of Hyduke Energy Services Inc. “Ninety per cent of our new [drilling] rigs are equipped with top drives for horizontal wells.”

The total depth of horizontal wells is often in the 3,500-plus-metres range, with perhaps 2,000 metres vertically drilled with 1,200 or 1,500 metres drilled horizontally. These require bigger rigs with plenty of horsepower, McCormack notes.

The shale gas sector in the United States has grown exponentially over the last five or six years, with most wells including a horizontal section and typically requiring the use of multistage fracking to maximize a well’s production potential. This is boosting U.S. demand for drilling and service rigs and other specialized oil field equipment.

For much of the last six to eight years, Canada has accounted for about 80 per cent of Hyduke’s business, but overseas demand for the company’s rigs has been increasing and could soon account for about 40 per cent of rigs sold, McCormack says.

CANADIANS SPENDING

Over the last 20 months, Canadian purchases have climbed. “In the first half of 2010, Canadian companies started spending again,” McCormack says. That continued in 2011. In June, Hyduke announced that it had been awarded a $5-million order for four partial drilling packages for the western Canadian market.

The year also saw the company win a couple of big orders for the international market. A U.S.-based drilling contractor that had bought from Hyduke before inked a $16.3-million deal for the purchase of a turnkey 1500 HP AC electric drilling rig package in late July. In October, the Nisku-based company announced a $32.2-million contract to supply a South American client with two turnkey 1000 HP AC electric drilling rig packages.

An Edmonton-based manufacturer, The Rig Shop Ltd. barely dipped in activity when the recession hit three years ago, although there were a few layoffs, concedes president James Clish.

“We worked through the slowdown as we had carry-over orders,” he says.

This year is shaping up as the second-best year to date for The Rig Shop, with 2012 likely the best year ever, Clish predicts. The firm has just completed an order for four drilling rigs with top drives. Purchased by a Canadian customer, Savanna Energy Services Corp., they were shipped to Australia for the busy gas drilling sector there. The company has more orders on the books with the large drilling services company, most likely destined for operations in Canada or the United States.

The firm has three shops and is soon to open a fourth.

The Canadian subsidiary of Houston-based Stewart & Stevenson, LLC has also seen a steady build in activity beginning in 2010. The manufacturer of rigs and other equipment has seen a spike in demand for coiled tubing rigs and other specialized equipment to service the fast-growing shale gas sector in the United States and Canada. “For service rigs, one niche we have is that our units don’t require external anchoring,” says Ed Dickinson, general manager for the firm’s Canadian operations.

The company is seeing increased demand for product both in North America and overseas.

But as activity ramps up across the oilpatch, and with more oilsands construction underway, rig manufacturers are finding it harder to hire the skilled trades they need—welders, machinists and fitters among them.

So, even with the recession over, Alberta’s rig manufacturing sector has its challenges: skilled labour shortages, China’s price competition and its apparent determination to improve product quality. But, although McCormack says that “Life would be easier with an 80-cent dollar,” he believes that Canadian rig manufacturers’ ability to make a top-quality product, and the probability that China will soon lose some of its competitive edge on price (as costs are rising there), could help the province’s rig manufacturers survive over the long haul.