Thank you very much.
Good morning, ladies and gentlemen. Thank you, Mr. Chairman, for the opportunity to come here today and present some views on behalf of the drilling and service rig industry. We're part of Canada's oil and gas upstream industry. There are the producers and then the service companies. We're part of a large collective that makes up the service industry.
The CAODC was formed in 1949, 60 years ago. We represent drilling and service rig contractors. In the slide material you can see pictures of some of the equipment. Our membership is comprised of 42 drilling contractors, 71 service rig contractors, and 150 associate members--banks and oil companies, and companies interested in our business. We have 890 drilling rigs in Canada's fleet. We also have about 1,150 service rigs. That represents 100% of all the drilling rigs in the country and about 98% of the service rigs.
In terms of employment, for every rig that's running, we have 25 jobs that are directly associated with our business--the drilling crew and the service rig crew. That number runs up to 135 if we include the rest of the service industry. We get that number because ours is a primary work site, but on that work site come a number of other individuals working for different companies in different phases of the industry. They come onto the location at various times during the operation. That number of 135 was put together by the Canadian Energy Research Institute.
I put a little piece in there about what we describe as the rig technician program. I did that, hopefully, for the committee's interest. The reason for that is Canada is the only country in the world--where oil and gas operations are undertaken--that has an established rig technician trade program in place. This was put together in 2004 in Alberta. It's actually a mandatory program in Alberta. It was rolled out to a number of other provinces and territories. It's a red seal program now. It has a curriculum that is agreed upon, and we actually try to drive that curriculum to ensure that everyone has the same training and is consistent across the country. Today we have 34 journeymen in place and another 3,000 technicians who are registered and working their way through the program.
In terms of where the drilling and service rig industries, or the service industry generally, fit in oil and gas, in the upstream industry, essentially our success, our economic health, is a function of the health of the investor, or what we describe as the operator. That's the oil and gas company. The upstream industries' economic health depends on three or four variables. Commodity prices, obviously, are very important. We measure our costs in Canadian dollars, but the resource production or potentials are actually measured in U.S. dollars.
Secondly, in terms of royalty rates or the fiscal regime, the royalty rates are set by each provincial jurisdiction, and depending upon how fair they are, the investor chooses to come and invest in the jurisdiction or not. Tax rates are set by the provinces as well as the federal government, and to the extent that the tax rates are viewed as reasonable and a return is left for the investor, then he's willing to take that chance.
In the cost of doing business, Canada is a fairly expensive place. A lot of the costs in the more remote areas are going to be higher than they are in some of the established areas.
In terms of regulatory burden, Canada has a fairly significant regulatory burden. I'm going to describe a couple of examples of that. Without upstream investment by the operator, the need for drilling stops, and with that the economic viability of our sector, of course, stops.
I put a little note at the bottom just to try to give you a sense of the size of the industry and what we, in turn, invest. We have invested about $4.7 billion building new rigs in the last ten years or so. That equipment is manufactured only in Canada. We don't import the stuff. We build it in Edmonton, Calgary, and a lot of it is built in Nisku and in Red Deer. That number I read to you doesn't include the capital maintenance for the same equipment, which is about $2 billion.
In terms of how we operate, I put in an activity slide for the last four years. What it indicates is that this is a seasonal industry in Canada. We work in the winter. It is the most significant time period for drilling activity. We slow down significantly in the spring. We call that breakup. And the reason we do that is we have no access to remote areas using the current infrastructure, meaning the roads. So if road bans come on, we can't move. We start working again in the summer--it's a function, quite frankly, of the amount of rain--and start wrapping our way up into the next winter drilling season, which essentially starts about mid-November. The ERCB in Alberta declares when winter starts.
The next slide shows a little bit about well completions and average rig counts. It's a 10-year or 12-year slide. The first column shows what's taking place in terms of average rig counts. You can see them back in 1996 at 316, rising in 2008 to 351. The second column talks about the fleet. The third is a very important one in our world, and that's utilization, because that shows, in terms of what we've offered to the market, what gets used, and of course then whether we profit or not. The numbers in red indicate years when economic activity was what we would describe as “sub-economic”; you can't make any money. If you're operating at less than 50%, then there is no contribution to the bottom line. Continue to do that for very long and you don't have a business.
In terms of well completions, that just gives a little bit of an order of magnitude as to what the industry is up to. In 1996 we drilled about 13,000 wells; 2005 and 2006 were great years, about 22,000; and now we're dropping off again. There was some confusion in the data; it'll show up in the operator data as well. The number we arrived at is 16,000, rather than 20,000; that's why it's starred. The data source is a bit of an issue, so to be consistent, what it really tells you is that in the last three years things are dropping off.
The next page shows what winter activity has been like for the last four or five years. Importantly, what it's trying to say is that in 2005 and 2006, when commodity prices were good, we operated at very high levels of activity. When commodity prices started to fall in reaction to some of the physical issues, some of the royalty taxation issues, particularly in Alberta, activity dropped off. If you look at 2009, you can see it significantly below where we have been in the previous four years.
The next slide is a forecast for 2009, and if you think back to where we were a couple of years ago, 2005-06, when we had 22,000 wells, we're suggesting we've got about half that in 2009, about 11,000 wells. We're going to run the equipment about 30% on average. It's clearly sub-economic. Again, you can compare that with some of the numbers along the bottom.
The assumptions include $50 oil. That's probably not too bad. For gas, our forecast is clearly not that realistic: $7. Gas is trading under $4 right now, and we suspect, quite frankly, that, if anything, this forecast will be reduced.
I put together a slide that talks about where we interact with the Government of Canada. The Prime Minister and others have stated that Canada would like to have this country be an energy superpower. Quite frankly, as a result of federal and provincial policy decisions--on the side of the federal government we had the income trust decision and on the provincial side we have Alberta's new royalty framework—investors have lost some confidence in Canada. For example, Alberta is ranked 50th out of 81 jurisdictions that were surveyed in 2008. Governments have regulatory policies in place that result in high-cost production.
In terms of where the drilling and service rig industries interact with the Government of Canada, I've given a description on the next slide. We interact on a regular basis on a number of taxation issues.
Transportation is a big deal in our particular industry. It takes a lot of time, and it bedevils us in some respects. We have human resources issues and we have exploration production issues, including revisions to various regulations.
I wanted to focus on two examples: a win and a struggle.
The win is this. We represent, of course, offshore rigs as well as land rigs. Our land rigs are positioned mostly in western Canada, but we have land rigs in Ontario and Quebec and the maritime provinces. In addition to that, of course, we have offshore drilling rigs. Five years ago, in 2004, we petitioned the Minister of Finance of the day to make a change in the duty applied against non-NAFTA rigs moving onto Canada's east coast. That was put in place, and it relieved the duty that was paid by those rigs and reduced, basically, the costs of operating in a high-cost environment. We think that worked well, and together with oil companies we petitioned the government of the day to extend that moratorium. On May 1, we were advised that this ask had been granted and that the moratorium will be in place for another five years. We're very grateful for that.
I put in a slide called “The struggle”. Hours of service, in particular, is something that is code for trying to make the roads safer. We're all on the same page there. Rules were drafted for all vehicles that have wheels, but essentially they're drafted for trucks, to make sure the 18-wheelers going back and forth across the country are doing so in a safe manner. We have wheels on our service rigs, and we're caught up in all these regulations, even though 95% of the time our rigs sit off-road. When we do move them, from time to time we move them in convoy and at low speed.
This was recognized by the provinces we work in, so we have structures and memoranda of understanding with the provinces that capture how we should regulate or deal with these across a number of areas. We've gone now to Transport Canada, because effective January 1, 2007, Transport Canada passed a new regulation respecting hours of service and said, here's how we are going to govern your activities, measured in terms of the hours that your drivers work.
We're okay with all that too. The only problem we have is.... We should recognize a couple of things. One is that we run 4,000 kilometres a year on average. Big-line truckers probably do that in a couple of days. Many of our rigs never see a public highway. Many of them sit over top of producing wells or new wells for weeks at a time. They just don't see much of the road. Provincial authorities have recognized that.
So we've said to Transport Canada, we have to produce a lot of documentation on a daily basis; why don't we take that measuring stick, the daily documentation we're doing anyway, and use it to measure the hours we're on the job, or potentially the hours we're actually driving, as opposed to setting up a new system intended for truckers and running it in duplication. That's our ask.
We began that ask two years ago. It will be two years ago in two weeks, actually. Still we don't have it. We met as an industry—ourselves, along with other parts of the service industry—on March 5 with Minister Merrifield to try to move the file. Still nothing has happened. We find that a bit of a struggle and a bit of a challenge. We're disappointed and are looking for opportunities to get that settled.
Mr. Chairman, ladies and gentlemen, thank you very much for a chance to talk about Canada's drilling industry.