Oilweek - March 2008

have always been able to adapt and he remains relatively unconcerned about the long-term impacts of the new royalty structure.

“We’ve been directly or indirectly in manufacturing for the last 30 years,” he says. “And if prior to the last boom—early 2000/2001—you had, say, 100 pieces of equipment then and you have 200 now but 120 are still working, do we really have a problem?” The only people I’ve heard complaining are the younger ones with the ski-doos and the $70,000 pickup trucks.”

In some ways he thinks a slowdown is not such a bad thing. “We couldn’t have sustained the pace anyway,” he says. “Many [companies] couldn’t find people or couldn’t keep people.”

Others share the philosophy. Jason Greene, sales and marketing manager for Bilton Welding and Manufacturing Ltd. of Innisfail, generally agrees with Cupples’ views.

“Honestly, we’ve seen a bit of a slowdown,” says Greene, “but we’ve diversified and aren’t too dependent on gas. We still see a lot of activity in heavy oil, unconventional oil, SAGD, etc. Those that have diversified out of gas are mostly doing okay.”

That’s because cutbacks by the larger producers like EnCana Corp., Canadian Natural Resources Limited, and Talisman Energy Inc. have largely been in the gas sector. Many of those big operators, Greene says, didn’t so much cut their expenditures as redirect the spending away from areas that might be impacted by higher royalties.

“When the royalty review came out, a lot of majors started shifting around budgets—many to northeastern British Columbia, or to Saskatchewan, or overseas. So in terms of that, yes, the royalty changes affected our industry. But we [had] already noticed a decline in drilling early winter last year; there was a slowdown with a weakening in gas prices.” For the most part, he says, the biggest drop in demand has been in Alberta.

“We’ve had a lot out-of-province [work], so that’s been steady. And some large contracts in the U.S.” So, says Greene, “we haven’t had to lay off at all. We’re still growing and expanding.”

In fact, Bilton, with over 100 employees, opened a new Innisfail facility a year ago that doubled its capacity. The strong Canadian dollar has been a negative factor, but the company, Greene insists, “can still be competitive.”

The rising dollar has indeed been a factor, agrees Douglas Freel, a vice-president at ARC Financial who specializes in analyzing the oilfield service sector.

“The oilfield service sector saw its fortunes decline long before the royalty review of September 2007,” he says. “First there were declining natural gas prices, the trust legislation of October 2006, then a rising dollar [creating lots of problems for any Canadian-based manufacturer], which all combined to cut drilling activity.”

The royalty review—and Alberta’s subsequent response to the review panel’s recommendations—was merely the most recent nail in the coffin. Share prices for most Canadian oilfield service companies peaked in the first half of 2006, well before the review panel’s work was done, although those share prices “have eroded further from the date of the royalty announcement.”

Freel says the royalty changes are contributing to a further erosion in drilling activity, which drives many manufacturers, but for those same manufacturers, the strong Canadian dollar has presented challenges that are at least as big, if not bigger.

“Many of these companies compete with U.S.-based companies, or sell their products into the United States, and the rising dollar has reduced margins for them,” he says. “As well, input costs [steel, labour, etc.] are generally not declining.”