The drilling industry used to be a lot simpler. Oil and gas producers would typically purchase a promising plot, drill a single borehole and expect steady, sustained revenue for years to come. But those days are over, says Mike Dawson, president of the Canadian Society of Unconventional Resources (CSUR).

“You can’t work on the premise of saying: I’m going to drill 10 wells and then I’m not going to drill any more, because your productivity is going to continue to decline,” Dawson says of drilling in so-called “tight” oil and gas plays instead of conventional ones. “You have to continue to drill to replenish your declining production.”

Unconventional drilling techniques, like horizontal drilling and multi-stage fracturing have become much more the norm at drill sites across Western Canada, as producers turn to these unconventional techniques to extract oil and gas from plays that were once thought to be either tapped out or too difficult to exploit.

But the production from these tight oil and gas plays often has a downside – following high initial productivity in wells, the output falls away sharply after the fracturing process, with decline rates reaching 70 per cent in the first year, compared to 45 per cent in conventional wells. This has created what observers call the treadmill effect: the pressure on producers to constantly drill new wells just to maintain a steady revenue stream, let alone grow production.

But while the drilling industry scrambles to stay on top of production in an increasingly unconventional age, many service providers are quietly reaping the benefits of the treadmill effect. Supplying drilling equipment, water treatment, fluid supply or pumping technology is becoming an enormous market for well-positioned businesses armed with a management team with foresight and the right business strategy.

Ridgeline Energy Services Inc. started out as a well contamination clean-up provider in 1999 under the name Bio-Synergy Resources Inc. The company has since shifted its focus to water treatment and environmental consultancy on unconventional drilling sites. It’s a growing side of the oilfield services sector due to the large amounts of water required in the fraccing process.

The shift in focus has worked out pretty well for Ridgeline. Between 2007 and 2011 the company increased its annual revenue from $1.3 million to $11.2 million. Tyler Heathcote, Ridgeline’s founder and president, says the company grew because of its focus on a specific product base in the industry and its flexibility entering the marketplace. “You’ve got to realize your capabilities and fit your technologies into the right areas of the industry.” Ridgeline installed its first Zero Impact water storage unit in New Mexico’s Leonard shale area in December. The stand-alone water treatment system can hold anywhere from 500 to 35,000 cubic meters of water, which can be remediated and stored for re-usage.

The aim was to make Ridgeline’s technology more versatile for producers. The Zero Impact system can be transported to site on a single flatbed truck, and doesn’t require the use of cranes to assemble or take down. “You want to be able to be flexible and accommodate the client’s challenges,” Heathcote says. “You want to help them try to solve their issues instead of force your products down their throats, so to speak.”

However, getting a piece of the unconventional action is not easy. One of those issues producers chasing tight oil and gas must deal with is the sheer up-front cost of drilling in resource plays. Drilling outfits can bore thousands of feet deeper than before, much of that length horizontally. Thus, producers are forced to buy larger-than-normal plots of land before the first well can be drilled to accommodate the considerable reach of the wells. The land doesn’t come cheap. The Government of Alberta raked in$3.54 billion on Crown land sales in 2011.

Some industry analysts are questioning the very idea of drilling in some of these plays – particularly drawing natural gas from solid shale formations where the payout is relatively modest. And evaluators are also stumped on how to accurately predict well production. The technology for running these tests is costly, and puts companies in a precarious situation when deciding whether an area is worth the investment to drill. “You have to have a conviction by senior management that you’re going to be successful,” Dawson says. Adding to the conundrum, some of the well locations are in remote and hard to reach areas, especially in the isolated Horn River basin in northeastern British Columbia.

As drilling practices and the technology used to extract unconventional oil and gas advance, Dawson expects that oilfield service companies left with outdated technology will quickly stagnate. “I think the critical component is – because it’s a very competitive business – successful companies are going to be on the cutting edge of new and emerging technology,” he says. Dawson adds that means supplying not only new technologies, but technologies that are specifically tailored to what drilling outfits need.

Calgary-based Western Energy Services Ltd., a drill rig supplier in Western Canada, has taken that business philosophy to heart. A subsidiary of Canadian Energy Services Ltd., the firm has grown rapidly by zeroing in on the unconventional drilling market. It bought five drilling contractors between December 2009 and June 2011. The company purchased Horizon Drilling Inc. in March for $66 million, and ended the second quarter of 2011 with a $236 million buy out of Stoneham Drilling Trust.

The company’s chief executive officer, Dale Tremblay, says of the company’s fleet of 26 rigs, 95 per cent are geared towards unconventional drilling. The leading-edge rigs are heavily equipped with technology ideal for tight oil and gas plays. Each of them is like an enormous multi-purpose tool of sorts, with gadgets like telescopic efficient long reach technology capable of drilling up to 4,500 meters below the Earth’s surface.

The newer rigs include 1,500 horsepower pumps, rather than the smaller 1,200 horsepower devices that were the standard before 2008. The rigs pump more water into the well – a necessity to break up the solid rock formations and oil deposits. Safety upgrades were also made for the equipment, including pipe handling technology and rig escape systems.

Without recognizing the demand for upgrades like high-power pumps, Tremblay says the company “would have been a big failure.” Tremblay says he and the company’s chief operations officer, Alex MacAusland, decided to equip their rigs with more capabilities as wells got deeper and water usage spiked around 2008. “We said: ‘God, we’ve just got to put bigger and bigger pumps on our rigs,’” Tremblay says. “That was our business strategy.”

Western Energy’s rig utilization rate is among the highest in the industry, at 72 per cent in the third quarter of 2011 (The Canadian Association of Oilwell Drilling Contractors puts the Alberta average at 57 per cent during the same time frame). That activity propelled the firm to record third-quarter revenues of $80 million. Tremblay says Western Energy’s ability to constantly keep rigs operating is due to the company’s unwavering emphasis on a very specific market: high-tech unconventional drilling. “That’s what we focus on; that’s what we’re best at,” he says. “I don’t even know if our guys could drill a vertical well anymore.”

Dawson considers equipment readiness to be among the leading advantages that set service industries apart in the unconventional drilling sector. He says it can also be a detriment to companies, however, if demand for specific services is misinterpreted. “There is a risk companies will go out and over capitalize in terms of equipment. It needs to be a very measured approach when you’re talking about increasing your equipment capabilities.”

But equipment isn’t always enough to ensure success in the competitive and always-changing services sector. “Right now it seems most folks I’m talking to in the services industry are having a hard time keeping up for a multitude of reasons,” Heathcote says. Chief among the concerns is an old industry bugaboo – retaining employees and attracting new ones as the oil sands continue to soak up the majority of able workers.

Ridgeline has been drawing bodies from the U.S. market as the unemployment rate continues to climb south of the border. “Looking out even three years on some of our larger projects, it’s going to be a real challenge to try and keep up with the demand,” he says of worker shortages. “We’re always in hiring mode here.”

And with natural gas prices languishing below US$4 for the foreseeable future, Tremblay is setting his sights on oil for growth opportunities. He predicts around 85 per cent of its activity is currently in tight oil plays. Heathcote has the same strategy at Ridgeline. “We looked at the Bakken and the Eagle Ford [plays] – places throughout North America where they’re using the same fraccing technology but for oil, because the price of oil is very, very attractive right now.”

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