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Providing coverage of Alaska and northern Canada's oil and gas industry
August 2018

Vol. 23, No.32 Week of August 12, 2018

Canada’s shriveling upstream

Gary Park

for Petroleum News

What little hope might have stemmed from oil prices settling around US$70 a barrel has been crushed by new industry forecasts that 6,900 oil and gas wells will be drilled this year, 200 below the 2017 count and 500 fewer than the April forecast.

Tom Whalen, chief executive officer of the Petroleum Services Association of Canada, said “several publicly traded Canadian service companies are reporting minimal improvement in the quality of bottom line earnings; many are sitting at near breakeven or are still in negative territory.”

He said Canadian companies are unable to gain from higher world prices because pipeline capacity is inadequate to deliver products to market, resulting in higher-than-usual discounts for heavy crude from Western Canada, while natural gas prices of C$1.55 per thousand cubic feet are languishing because of competition from U.S. shale gas.

Whalen said the results are “not sustainable from a business continuity and competitiveness perspective. It is also a compounding symptom of the sector’s lack of attractiveness for investment.”

Jennifer Rowland, an analyst with Edward Jones, said “transportation bottlenecks are by far the biggest challenge for Canadian producers, mainly because pipeline constraints won’t be alleviated until the end of 2019 at the earliest.”

Spending plans slashed

Tired of waiting for a turnaround in Canada’s regulatory sector, Canadian-based companies are slashing their spending plans while U.S.-based upstream firms are leaving Canada for good.

The retreat by international producers - notably Royal Dutch Shell, ConocoPhillips, Statoil and Total - saw the total value of foreign direct investment in Canada dive by 7.4 percent in 2017 to C$162.2 billion.

And that sale of assets doesn’t account for tens of billions of dollars of potential LNG projects linked to Asian markets that were scuttled because of low commodity prices and domestic regulatory uncertainty.

Acquisitions of Canadian oil and gas assets by foreigners hit a decade low of C$1.43 billion last year, compared to an annual average of C$12.5 billion over the previous decade, according to data collected by the Financial Post.

Canadian-based companies have also been shifting their direct investment beyond their home territory, with Statistics Canada, a federal government agency, estimating that shift rose from C$60 billion in 2013 to C$100 billion in 2017.

Canada used to be a “jurisdiction where people would dial down risk,” said Rafi Tahmazian, portfolio manager at Toronto-based Canoe Financial. “Now these investors dial up risk when coming to Canada.”

The mood of caution was reflected by Steve Williams, chief executive officer of Suncor Energy, the largest integrated oil company in Canada.

He said that even though his company is more profitable, it has no intention of rushing to sanction new projects.

- GARY PARK






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