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Will the rising tide of LNG lift all boats in the energy services sector?

"The impact in Alberta will be somewhere in the range of $20 billion – at the low end"

May 16, 2014

by Max Fawcett

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It’s coming. For all the risk factors still standing in the way of LNG exports from the coast of B.C. – be they an oversupplied natural gas market or a provincial government seemingly intent on botching the roll-out of a proposed tax structure – market watchers still say it’s highly likely that at least one LNG export project (and probably two or three) will get built on the coast of B.C. before 2020.

“We always say the industry will learn and get more efficient, but I think there’s a real risk that a couple of factors will create a scenario where the anticipated spend or the budgets we see today will come in light.” – Josh Matthews, vice-president, Sequeira Partners

One of those watchers is Josh Matthews, a vice-president with energy consulting firm Sequeira Partners, and he thinks four billion cubic feet a day of LNG exports is a realistic expectation. “If that happens, you’d be looking at as much as $50 billion of incremental spending across the whole basin,” he says. “Not all of that is drilling and completions just in the Montney, and not all of that would go to Alberta-based firms. But the impact in Alberta will be somewhere in the range of $20 billion – at the low end.” For a service sector that’s had to contend with a surplus of capacity and plunging prices in the province’s most service-intensive commodity, natural gas, that would be a welcome relief. “The frackers are dying because they quit drilling Horn River gas,” says David Yager, MNP’s national leader of oilfield services. “So if somebody could get going on this, they’d be happy as a clam. North American fracturing capacity is overbuilt right now.”

The bulk of that $20 billion of capital expenditures would go directly onto companies’ profit and loss statements, too, as the majority of the work is the drilling and fracking of wells needed to feed the terminals. Yager refers to these players, a category that includes companies operating drilling rigs and those supplying pipelines and downhole tools, as “tier one suppliers,” and he thinks their market is reasonably stable – and closed to new entrants. “It’s a big guy’s game now.”

The tier two suppliers is where it gets more interesting – and potentially more lucrative. “Dirt-moving guys, building roads, digging ditches to lay pipes, welders, fabricators, health and safety contractors, all the more local stuff – that’s an area where they’ll need all that stuff right away, so there could be a bit of a frenzy,” he says. Yager thinks companies that are in the business of housing workers in temporary camps could be in for a bit of a boom as well. “That’s one where this really would be incremental capacity, and in an entirely new place where all of a sudden you have to support activity where there hasn’t been activity. That might be an interesting spot to be.”

Finally, he says, there are the tier three suppliers. “Everything else will go in for a while, [they’ll] build all this stuff and then go away. But in the production phase, that’s where you’re going to need new communities. You’re going to have to go check these wells and compressors and gas plants and pipelines every day, and that’s where the hotels and restaurants and local welders and machine shops and maintenance and instrument calibration guys come in. That doesn’t exist at all along that route – it exists, to some degree, where the production is, but all the rest of the way along the line, that’ll be interesting.”

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And while each tier will benefit in different ways, they’ll all benefit from the stable, long-term nature of LNG projects. When combined with the oil sands, where maintenance expenses are an increasingly big portion of producers’ budgets, that could create an element of top-line stability throughout the sector. “The work doesn’t move up and down based on commodity prices,” Matthews says. “Yes, that will have an impact, and it always does, but when prices move to an all-time low for six months on a 25-year project, it doesn’t mean anything. They don’t slow down. So it absolutely would put a floor under service levels, where you could treat that kind of work as an annuity.”

But if the growth of LNG is good news for service companies, it might be even better for the people they employ. That’s because the competition for already-scarce labour could get intense – and expensive. “Labour is at the top of everyone’s agenda,” says Mark Salkeld, president and CEO of the Petroleum Services Association of Canada. And while he says LNG doesn’t necessarily mean a return to the “hectic franticness” of 2005 and 2006, he thinks that’s a risk that bears watching. “If we get gas prices up to $7 or $8 [per million cubic feet], investor confidence returns and we’ve got a market offshore, then the Montney will play a big part in supplying that gas,” he says. “It’s a very significant play in Canada, and a very significant gas play for Western Canada. If gas prices get up there, it’s going to get crazy.” Matthews agrees that cost inflation is a major risk. “We always say the industry will learn and get more efficient, but I think there’s a real risk that a couple of factors will create a scenario where the anticipated spend or the budgets we see today will come in light.”

It gets worse – or better, depending on which side of the paystub you’re on. That’s because LNG development in B.C. may pull labour away from existing operations elsewhere in Alberta, and allow people who left B.C. to find work to return home. With activity ramping up in Saskatchewan as well, Salkeld thinks Albertan companies could soon find their out-of-province employees heading back in both directions. “We have lots of folks working here from B.C. who would like nothing better than to go home,” he says. “So losing talent to B.C., in trades like construction and welding and electrical – it will affect us indirectly.” That’s already starting to happen, he says. “We’re down in Brandon, and one of our member companies opened up a shop and hired 75 local people – or people that were local that were working in Alberta and have come back. We’ve lost them. So that’s absolutely a concern.”

If there’s good news on the labour front, it’s that the kinds of wells that companies would be drilling to supply LNG export terminals aren’t as labour intensive as the ones that we’re being drilled back when gas prices threatened $10 in the mid-aughts. “The stuff that was going on in ’04 and ’05, it was a totally different environment,” Matthews says. “It was lots and lots of wells, but nowhere near the complexity that we’re seeing here. The labour requirement might have been a little higher before. Right now, the equipment matters, and the equipment does more of the work than it did five or 10 years ago.”

David Yager is clear: LNG is good news for just about everyone with even a passing interest in the service sector. But, he says, it’s still a challenging – and challenged – business. “The rule of thumb is that the service business is unable to outperform its clients, and we have a bunch of clients that are still trying to find themselves. Talisman still doesn’t know what it is, Encana is retooling, Penn West is trying to find itself and the junior sector is forgotten. So is this the best shape I’ve seen the service business in? No, it’s not.”

And, he says, the biggest worry of all might not be that service companies lose control over their costs but that the producers with whom they do business take an even closer look at theirs. “A lot of companies are looking at the amount of money they’re spending and what they’re getting for it, and that’s not a particularly healthy environment for service companies,” Yager says. “The oil companies are being a lot more prudent with their capital and their returns than they have been. When it’s ‘drill baby drill,’ that’s brilliant for the service industry. But when oil companies are exercising a higher level of fiscal discipline, well, what fiscal discipline means to the vendor is lower prices.”

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