Presentation to the
Alberta MLAs
Mark A. Scholz
CAODC President
Overview
Introduction to the CAODC
• Who is the CAODC?
• The work of the Association
• What our members do?
• How to measure our industry’s strength
State of the Industry Report
• Economic Value
• Commodity Prices
• Impact to Drillers and Service Rigs
• 2016 Forecast
• Economic Consequences
• Opportunities
• Alberta Royalty Review
Four Ways to Look at Global Carbon Footprints
About the Membership
Land Drilling Contractors
40
Land-based drilling rig fleet
754
About the Membership
Service Rig Contractors
82
Service rig fleet
1030
About the Membership
Offshore Drilling Contractors
3
Offshore rig fleet
6
CAODC remains true to what its founding members envisioned in 1949:
to promote strong, safe and efficient operations in Canada’s rig sector.
Operational Excellence – Industry Standardization
• Recommended Practices (RPs)
• Training/Competency
• Health, Safety & Environment (HS&E)
• Business Processes
Communications & Advocacy
• Labour challenges
• Market access
• Competitiveness
• Effective regulation and public policy, harmonization
• Industry education – public and government
• Worker outreach and recruitment
• Statistics – Rig Activity (Utilization, Operating Days)
Oil & Gas Basics
The Life Cycle of a Well
1. Drilling rig drills down to
discover the viability of a
basin.
2. A service rig is brought to the
site after a drilling rig's work is
complete
3. The pump jack is used when
a well is 'on-stream.’ The
machinery in the pump jack
mechanically pulls oil or gas
to the surface.
Comparison of Business Models
Drilling/Service Rig Contractor
Service & Supply
Exploration & Production (E&P)
Assets: Rigs/equipment, people
Revenue: Fee for service, day rate
Implications: Rigs must be
contracted in order to generate
cash flow.
Assets: Producing well(s)
Revenue: Production multiplied by the spot
or contract rate.
Implications: E&Ps have continuous cash
flow from a producing well(s), even in a low
price environment.
Three Ways to Measure Rig Activity
1. Rig Counts
Knowing how many active drilling rigs are at work indicates
how busy the rest of the oil and gas industry is.
One (1) Active Rig = 135 direct and indirect jobs
Oil and gas is a labour intensive industry and generates jobs:



directly at the rig (approx. 20)
indirectly in the oilfield service sector
(approx. 115)
in rural communities near oil and gas
exploration and production
Three Ways to Measure Rig Activity
2. Rig Utilization
Rig utilization is the percentage
of active rigs. In Canada, rig
utilization has a distinct annual
cycle.
Rigs are busiest in the winter and experience a period of low rig
activity called spring break-up.
The activity cycle is very pronounced for drilling rigs (fewer drilling
rigs work in spring and summer) and slightly less pronounced for
service rigs.
Three Ways to Measure Rig Activity
3. Operating Days & Operating Hours
Rig contractors charge for services based on operating
days. Operating days reveal the strength of the rig sector
better than well counts.
Currently, oil and gas companies in western Canada are
drilling and maintaining complex horizontal wells. This
means drilling contractors are drilling fewer wells, but
they're working as many operating days.
Economic Value of the Industry
 Largest private sector investor in Canada ($48 billion estimated in
2015, down from $81 billion in 2014)
 Annual government revenues of $17 billion (three year average to
2014)
 Employs approx. 450,000 in Canada (direct & indirect)
 Canada is the 5th largest producer of natural gas globally
 Canada is the 5th largest producer of crude oil globally
 GDP Impact provincially of the oil and Gas industry across Canada
between 2015-2025 (CERI 2015) - $7.6 trillion
 AB = $5.9 trillion
 BC = $765 billion
 ON = $395 billion
 SK = $362 billion
 MB = $32 billion
 QC = $124 billion
 NL, NB, NS, PEI, NWT, NV, YK, = $29 billion
Economic Value of the Industry
Oil Sands
 2014 capital expenditure of $33.9 billion, 2015 forecast down to
$23 billion
 The Oil Sands industry will utilize:
 over 20,300 Alberta companies as suppliers and business
partners
 over 2,300 Canadian companies (outside Alberta) as suppliers
and business partners
 over 300 Aboriginal owned companies as suppliers and
business partners
 Oil Sands development is expected to contribute over the next 20
years:
 $4.0 trillion to the Canadian economy (CERI 2015)
 pay an estimated $1.2 trillion in provincial and federal taxes
(CERI 2015)
Since July 2014 –
71% drop in pricing in
North American prices (WTI)
($100/bbl to $29/bbl)
The story is worse for
Canadian heavy crude
producers who sell at a
discount for less
than $20/bbl.
Source: ARC Financial
Brent Oil Price Vs. Global Over-Supply
Estimate first half of 2016 supply-demand imbalance is 1.5M barrels.
Source: IEA
40% drop in market value
Trillions of dollars in
global market value lost,
impacting retirement
funds, jobs, businesses,
communities and future
investment opportunities.
50% drop in market value
Source: ARC Financial
Where are Prices Going?
Here is what the future/forward strips (January 12, 2015) look like.
Source: ARC Financial
What do these prices mean for Canadian energy producers?
Most of North American production is under threat.
Source: Wood Mackenzie
What do these prices mean for global energy producers?
All global jurisdictions but Saudi Arabia are under threat.
Source: Energy Aspects
But if you include OPEC median budgetary breakeven price,
even Saudi Arabia is feeling the pressure of the low price environment.
Source: OPEC "break-even" prices in 2012. (Matthew Hulbert/European Energy Review)
What is behind the lower price environment?
A traditional supply / demand imbalance.
1. Global Oil Demand
Slow global growth (i.e., China) resulting
in low demand growth.
Source: ARC Financial
What is behind the lower price environment?
A traditional supply / demand imbalance.
2. OPEC Production
OPEC aka Saudi Arabia’s market share strategy.
Source: ARC Financial
What is behind the lower price environment?
A traditional supply / demand imbalance.
3. US Production
Record production from the US resulting in high
inventories. Iranian lifted sanctions to add an
estimated 500k to 1mm/bpd.
5 MMB/d to 10MMB/d
(2011 – 2015)
Source: ARC Financial
Impact on the drilling and service rig community …
Source: CAODC
Source: CAODC
•
Lowest active rig
count since the
1980s.
•
Lowest utilization
recorded by
CAODC (1977).
•
Lowest operating
days in over two
decades.
•
Lack of winter
drilling – Q1.
Source: CAODC
Source: CAODC
Estimated Capital Flow in the
Canadian Oil and Gas Economy for 2015
Industry Revenue, Cash Flow, Reinvestment Drilling Activity and Production
Source: ARC Financial
Impact of declining commodity prices in 2015
Revenue
 Industry revenues down 40%
• $150 billion in 2014 to $90 billion in 2015
 Oil and gas share of TSX down from 20% in 2014 to 12% in 2015
 Announced layoffs to date – 40,000 direct.
• Direct & indirect – 100,000 Canadians
Source: CAPP, ARC Financial
Impact of declining commodity prices in 2015
Capital Investment
 Canadian capital investment show significant year/year reduction
• 2015 down 41% reduction in 2015 from 2014
• $81 billion in 2014 to $48 billion 2015
• 2016 investment down at least 12% from 2015
• Oil sands down almost one-third in 2016 from 2014
 Upstream sector still largest private sector investor in Canada
Source: Statistics Canada
Capital Investment in Canada
Combined Capital
Investment
Source: CAPP
Impact of Declining Commodity Prices in 2015





Source: CAPP
Announced layoffs to date – 40,00 direct
Direct & indirect – 100,000 Canadians (CAPP)
Land sales are down across Western Canada
Bonus paid down from $1.1 billion in 2014 to $375mm in 2015
In Alberta for example, the price paid per hectare, is down about 60 per
cent, selling on average for $185 this year compared to $453 last year
Time Out
Let’s talk about the opportunities!
Capital Investment in Canada
World Oil Reserves
100%
Source: CAPP
Market Access and Diversification
Traditional Markets vs. Non-Traditional Markets
World natural
gas consumption
1990 – 2035
(trillion cubic feet)
Source: EIA
Market Access and Diversification
Traditional Markets vs. Non-Traditional Markets
Net Oil Imports
Source: CAPP
Market Access and Diversification
Canadian Oil Sands & Conventional Production
Source: CAPP
Market Access and Diversification
Quebec imports 1/3 of its oil from 5 corrupt nations
Source: Resource Works
2015/16 Royalty Review
Objectives:
 To provide optimal returns to Albertans as owners of the
resource.
 To continue to encourage industry investment.
 To encourage diversification opportunities such as value-added
processing, innovation or other forms of investment in Alberta.
2015/16 Royalty Review
Optimal Returns? What about…
 High paying, high skilled job opportunities for Albertans.
 The service sector is a benefactor of industry activity and are locally
owned and operated in the province.
 Small businesses such as hotels, restaurants, retail, etc. are a
product of positive externalities from industry activity.
 What about corporate, personal and fuel taxes, etc. that are created
through industry activity?
 Is this all about optimizing government royalty revenue or optimizing
benefits to Albertans? The two concepts are not necessary mutually
inclusive.
2015/16 Royalty Review
CAODC Position
 Royalties should be lowered to offset the increased cumulative costs
to industry in order to preserve Alberta’s competitiveness.
 20% corporate tax increase
 Higher carbon levies
 Royalty rates should optimize the benefits to Albertans and not
necessarily government revenue.
 This is not a pure business decision.
 The government should consider being the most competitive rather
than middle of the road.
Four ways to look at
global carbon footprints
Four Ways to Look at Global Carbon Footprints
1. INTENSITY
(millions of metric tons)
Source: National Geographic
Energy efficiency has helped many developed nations
reduce their GHG intensity – emissions per unit of GDP.
Four Ways to Look at Global Carbon Footprints
2. PER CAPITA
(millions of metric tons)
Countries with large populations, including fast-developing
countries like India, have low emissions per capita compared
to many industrialized countries.
Source: National Geographic
Four Ways to Look at Global Carbon Footprints
3. CURRENT EMISSIONS
(millions of metric tons)
China is the world’s top contributor of GHGs,
followed by the United States.
Source: National Geographic
Four Ways to Look at Global Carbon Footprints
4. CUMULATIVE EMISSIONS
(millions of metric tons)
Measured since 1850, reflecting historical industrialization,
emissions from the United States and Europe far surpass
those of other nations.
Source: National Geographic
Oil Sands Statistics
Environmental
 Oil Sands GHG emissions have declined 30 per cent per barrel from
1990 to 2013.
 Canada produces about 2% of global C02 emissions. Oil Sands
account for 8.5% of Canada’s GHG emissions while transportation
accounts for 23%.
Source: CAPP
Canadian Association of
Oilwell Drilling Contractors
Suite 2050, 717-7th Avenue SW
Calgary, AB T2P 0Z3
Tel: 403-264-4311
Fax: 403-263-3796
Web: www.caodc.ca