From the Financial Post:
“There’s a realization there’s certain realities at play here,” said John Enns-Wind, mayor of the century-old town that is now home to more than 5,000 people in west-central Saskatchewan’s resource-rich farm country.
The oil and gas boom, along with record crops in recent years, means Saskatchewan is experiencing record growth, one of the highest employment rates in Canada and a population that has risen more than 10% in seven years to a record of almost 1.13 million.
They’ve been pumping oil and gas around Kindersley for 50 years, and the fracking boom — like all others before it — comes with challenges.
Fierce environmental campaigning, first against oil sands development, and now fracking, has unsettled the industry: one major oil producer fears being singled out by environmental activists as a “fracking” company. However, a new — much more price-sensitive — concern is emerging as an immediate threat to the fracking boom that’s redrawn the North American energy map.
The big concern now is OPEC heavyweight Saudi Arabia blaming the fracking boom as the reason for the sharp drop in oil prices. The most-anticipated meeting of the Organization of Petroleum Exporting Countries in years takes place Thursday in Vienna as their ministers attempt to address an almost 30% decline in benchmark crude prices since June.
The price of West Texas Intermediate crude has slid below US$75, with North America now pumping 1.2 million additional barrels a day from tight-oil fracking: By comparison, the oil sands is only adding 170,000 barrels a day to North American supplies. Fracking has helped the U.S. overtake Saudi Arabia as the world’s largest producer of liquid petroleum — crude and liquids such as propane and enthane.
This week’s OPEC meeting should determine if the Saudis are willing to maintain the cartel’s current production rate and accept lower prices to force high-cost producers from the market.
“The Saudis are freaking out because they’ve lost a lot of market share so they’re now discounting to recapture it in the U.S.,” said Glen Hodgson, chief economist at the Conference Board of Canada. “It’s almost a game of chicken now between the Saudis and frackers in North Dakota and Texas.”
The playing surface extends into the tight oil plays across Alberta, Saskatchewan and Manitoba.
“It’s been a four- to five-year boom in town based on fracking,” Mr. Enns-Wind said of Kindersley. “We live in a community where everybody’s job, in one way or another, is connected to the oil industry… the phrase [people] are using around here these days is ‘cautious optimism.’” The oil price slide is more likely to impact towns like Kindersley than mega-project developments in the oil sands, where investments are often judged over decades, not the next quarterly results.
Even with a pressing need for permanent housing in Kindersley, Mr. Enns-Wind said the municipal growth plan is focused against overbuilding in a boom. Dozens of communities in Saskatchewan have placed moratoriums on publicly funded infrastructure to help minimize the sort of labour strains that have created crises over the last decade in Calgary or Fort McMurray. About 60% of wells drilled this year in Saskatchewan, 70% in Alberta and 90% in B.C., will be fractured, according to the Canadian Association of Petroleum Producers.
The basic elements of hydraulic fracturing — using equipment to force open fissures in porous shale to extract oil and gas — date to the 1950s in Western Canada, but the multiple-stage process applied now is more powerful, far-reaching and typically uses large amounts of water and sand.
The earlier shale-gas boom from fracking boosted production so much that it drove prices too low for years to justify spending on gas drilling. Increased production from the Bakken, Cardium, Viking and Montney shale formations reversed a decade-long slide in conventional oil production in Western Canada. Tight oil production in Canada has doubled since 2011, according to the National Energy Board, surpassing 400,000 barrels a day in 2014.
About 90% of the wells to be drilled in Canada in 2015 will target oil pools. Now, lower cash flows are cutting into oil-drilling activity. “It’s not just $30 in profit that’s going away, it’s the investment in the next well that is going away,” said Ali Daneshy, principal at Daneshy Consultants International in Houston, which advises on hydraulic fracturing. The Canadian Association of Oilwell Drillers and the Petroleum Services Association of Canada have forecast that the oil price slide means drilling is likely to decline about 10% in 2015.
Raging River Exploration produces all of its 10,000-barrels-per-day of oil in the Viking formation and is among the companies that use Kindersley as a regional operating base. CEO Neil Roszell doesn’t make much of the suggestion the Saudis are focused on far-flung junior producers like Raging River. “I think we’re completely irrelevant,” he said “They really look at the big picture.”
But Mr. Roszell is feeling a definite sense of caution for 2015 in an industry that last dealt with a price shock in 2008 — just as fracking was emerging as a game-changer in the oil patch. He said analysts want producers benchmarking their spending plans at US$75, US$70 and US$65 a barrel. Even with the fall in oil prices, he expects that Canada’s short winter drilling season will ensure activity levels are high through the first quarter. “Guys are looking at it and saying, ‘we’ll adjust budgets and activity in the back half of 2015’ and that’s when the pain of a lower price trickling through to the economy really would get felt,” he said.
Mr. Roszell said companies with strong balance sheets can still grow until oil prices “fix themselves” over the 12 to 18 months. He also understands the “cautious optimism” in Kindersley, where the ups and downs of oil prices are too familiar. “They’ve seen booms come and go,” he said.
Mr. Enns-Wind embraces the town’s revitalization due to fracking, but admits he’d be content with a pace of growth that would ensure against crunches in housing or staffing at the local Tim Hortons and McDonald’s. “It might be nice to take our foot off the gas a little bit and catch up,” he said.