Oilpatch faces project cancellations with crude at $82
As earnings season approaches, analysts weigh investment prospects for next year
CBC News, Oct 20, 2014
The falling price of oil will likely result in a round of project cancellations and disappointing results in the Canadian oilpatch, analysts say.
As oil companies bring in third quarter earnings, starting toward the end of this week, they’re facing oil priced at just above $80, down about 20 per cent since June of this year.
Today West Texas Intermediate oil contracts seem to have stabilized at $82.71 US a barrel, down four cents on the day. That’s up from the lows below $80 set last week. Western Canada Select, the price received by many Canadian oil producers, is at $69.10.
“When the price falls to where it is now, certainly a lot of crude oil producers are having a second look at future projects for expanding the oilsands until they see where things shake out,” says Michael Ervin, of petroleum consultancy M.J. Ervin & Assoc.
“There is going to be some curtailment of some projects that were predicated on a higher price. The fact is there is some projects in Alberta that are very sustainable at a much lower crude oil price, but some that really do require prices at or above $80,” he said in an interview with CBC News.
Oil firms planning for the year
Stephen Ewart, an energy columnist for the Calgary Herald, agrees lower prices are a problem, but says the drop may be temporary.
“In the coming week the third quarter results are coming out and we’ll hear from the oil companies,” he said.
Husky Energy and Cenovus Energy Inc. are reporting Thursday, with Suncor and Canadian Natural Resources to follow.
“They’re also making their capital budgets for 2015. This is coming at a time when they’re planning spending for next year and it’s concerning some people,” Ewart said.
He expects a pullback of about 10 per cent in capital spending next year.
“I’ve seen reports of capital spending in the oil patch of $66 to $67 billion a year, I think that could come off by 10 per cent,” he told CBC News.
The markets have already responded to the expected slowdown, with the capitalization of energy stocks down sharply.
Are pipelines still viable?
The problem of getting oil to market still hangs over the oilpatch. Canadian producers get a lower price because of bottlenecks in shipping and refining oil. The Keystone pipeline project to the U.S. is stalled and pipelines such as Northern Gateway face multiple hurdles.
Oil at a low of $80 could raise a big question market about pipeline projects, according to Jeff Rubin, former chief economist with CIBC World Markets and author of The End of Growth.
Pipelines are only economic if the oilpatch steps up production, but at these prices, it’s not likely to, Rubin said.
That’s because, while Saudi oil is cheap, both U.S. shale and Canadian oilsands crude demand higher prices to be viable.
“Obviously Stephen Harper’s view of Canada becoming an energy superpower is going up in smoke because these prices aren’t going to allow production to increase,” he said.
Rubin argues the world demand for oil is in long-term decline, both because of increased efficiency and the price increases in crude we’ve seen in the past decade.
Break the cycle
The world economy has slowed, in part, because of the fact that prices have been high, Rubin said.
“Maybe it’s time to get out of this yo-yo and lessen our dependence on oil,” he said.
Today’s low prices are the result of a glut of oil, as U.S. producers ramp up domestic production and OPEC refuses to scale back. Demand is down because of a dip in economic growth.
But low oil prices are also a problem for both the Alberta treasury and the Canadian economy.
“We all know that the oilsands is a major contributor to the Canadian economy and going full throat a year ago, we saw a high Canadian dollar,” Ervin said.
“That of course created problems in the manufacturing regions of Canada, mainly Ontario.”
The dollar has fallen as oil prices fell and that could help boost exports and help Canadian manufacturing, he said. But government revenues from oil are going to take a hit.