Saskatchewan’s doors are open to oil and gas producers

by Jim Bray

REGINA, Sask. – No one should be surprised that the current low price of petroleum products has cast a pall over the western Canadian economy, but even in the downturn it appears there’s hope for the future. And it appears that Rider Nation, not Wild Rose Country, may be the province best situated for the eventual turnaround.

“The good news is that while the downturn has affected the numbers, Saskatchewan is better positioned to weather this than maybe other jurisdictions,” said Ed Dancsok, assistant deputy minister in Saskatchewan’s Petroleum and Natural Gas Division. “We have a more robust and diverse economy, so where oil and gas has maybe dropped off we’re seeing increases in activity (elsewhere).”

He said there’s actually more work for the service and supply sector right now because of mining – both potash and uranium – and “we’ve got robust agricultural activity going on, which is helping with things like trucking and all the services that they need.”

He also noted that Saskatchewan is bucking the national trend in manufacturing, which he said is up 2% compared to a national drop of 1.4%. “We’re seeing some areas of the economy that are picking up the slack where oil has maybe dropped. I don’t think it’s going to equal the overall activity but certainly it has picked up some of that slack.”

Dancsok pointed out that the oil and gas downturn, which he acknowledged is a steep one, is being felt in all the western provinces that host the industry.

“Looking at the latest numbers, activity for rigs is at around 27% of fleet right now (across the west),” he said. “Last year it was around 53%, and when we look specifically at Saskatchewan, we’re at about 24% whereas last year we were at 58%.” He said there are currently 31 rigs operating in the province out of a possible 127. The rest are mostly sitting idle; Dancsok said a few have been hauled out but “there’s really nowhere else to go anyway.”

The drop from just over 80 rigs operating last year to 30 this year has resulted in about a 40% drop in the number of wells drilled so far this year compared to last year, Dancsok said. On the other hand, that isn’t a completely apples-to-apples comparison.

“Last year was a record year for oil wells” he noted, “so we’re comparing this year to a record year and I don’t know if that’s entirely fair. But certainly, when you compare what we’ve done this year to the five-year average, we’re still down 37%. That’s certainly a drop.”

Not an unprecedented one, though. “When we look at the last time prices dropped like this, in 2009, we’re actually ahead of that year,” Dancsok said. “We have just over 1,000 oil wells drilled in Saskatchewan so far this year, while back in 2009 at the same time there were only 639 wells drilled. That tells me the industry’s a bit more resilient this year.”

He attributed the change in part to “a lot of cost-cutting measures that took place earlier in the year from the service and supply sector,” measures he said have helped the industry manage its margins better. “The economics per well would be better, too,” he said, “and I think that’s the result you’re seeing. It certainly still is a drop and we are not targeted to get anywhere near last year’s number.”

Dancsok noted that Saskatchewan’s natural gas industry never really recovered from the big slump in 2008-2009, and cited that old chestnut of supply and demand as part of the reason, including “the shale gas thing that’s taking place in the United States and elsewhere in Canada. But Saskatchewan doesn’t have a shale gas resource and so since 2008 the gas has really dropped off.” He said that so far this year, only one gas well has been drilled in the province.

Despite the current situation, Dancsok said he’s bullish on oil making a comeback, even as alternative extraction methods and new reserves are being discovered around the world, seemingly on a regular basis. “The market will correct eventually,” he said. “I’ve probably seen five or six of these cycles; this one seems to be a little longer lingering because of what’s happening with OPEC and their efforts to try gaining more market share, but the market will correct and when it does I think Saskatchewan will be ready to continue its growth and look for more investment.”

Dancsok said the best cure for low oil prices is low oil prices themselves. “Right now, we’re in this stage of uncertainty as far as markets and demand is concerned, with China and other places not growing as fast as we had expected, but I think that demand someday will turn around and when it does, because of the lack of drilling going on right now, you might see the tables turn, where we have less supply than demand and that’ll quickly change the price. It’s simple economics: the price goes down and as that supply dwindles and the demand changes, the tables will turn.”

As for whether the NDP government takeover in the province immediately to the west could spur a potential windfall of investment from companies leaving Alberta for what might seem greener pastures in Saskatchewan, Dancsok says there’s been some action but it’s probably still too early to say if it will become widespread.

“I wouldn’t typify it as a stampede,” he said, “but certainly there are companies looking at Saskatchewan and seeing what opportunities there are here. And that’s a good business decision to make, I think. If corporate taxes are changing in one jurisdiction then it’s natural for a company to look and see if there’s a better business case elsewhere.”

He said, however, that no head offices have inquired about relocating yet. “There’s a wait and see attitude so far. There’s a royalty review proposed in Alberta and maybe it’s more about seeing where that ends up before any big reactions take place.”

Dancsok said Saskatchewan isn’t planning any major policy of tax or regulatory changes to make the province a sweeter place to invest.

“The royalty rates are very competitive with Alberta already,” he said, “so we’re simply going to stay the course and keep them stable and predictable. That (stability) is probably more valuable than anything else. Industry simply wants certainty and they can certainly get that in Saskatchewan.”

He noted that the province’s tax system is reliable and said there are no plans to do the type of royalty review that has been done “three or four (times) since 2007” in Alberta. “Certainly what industry enjoys in Saskatchewan is an already competitive and friendly business environment, coupled with stable royalty rates and taxes that give them the confidence they need to make their investments.”

The message to investors in the oil and gas industry is clear. “We’re here, we’re competitive, we have a friendly business climate, we have good regulations in place that are stable and workable and we’re not in the game of changing things drastically,” Dancsok said. “That provides the stable, certain climate that industry is looking for.”

In other words, Saskatchewan is open for business.

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