Providing coverage of Alaska and northern Canada's oil and gas industry
September 2009

Vol. 14, No. 37 Week of September 13, 2009

Profits to rebound, along with costs

Gary Park

For Petroleum News

Profits for Canada’s crude oil industry will likely fall 24 percent this year from the record levels in 2008, but the pain should be short-lived as prices resume their long-term upswing in 2010, said a report by the Conference Board of Canada.

The independent think tank estimates pre-tax profits for Canadian producers will tumble to C$11.6 billion in 2009 from C$15.2 billion last year, while output will edge up only 1.8 percent because of the deferrals of nonconventional projects and the slump in conventional drilling.

“The Canadian oil industry has long been a boom or bust industry and that has been the case over the past year, but stimulus packages around the world will lead to improved performance starting in 2010,” said board economist Todd Crawford.

“Accordingly, oil prices will resume their rise, eventually reaching US$103 a barrel by 2013 (after bottoming out at US$35),” he said. “Surging revenue growth related to higher prices will result in profits topping US$32 billion for the end of the forecast.”

Crawford also predicts a resumption of delayed oil sands projects and production increases at existing plants, doubling volumes to 2.4 million barrels per day by 2013.

He wrote that the slowdown in production and investment will also slow the increase in total costs to 12.8 percent, compared with the 27 percent increase last year.

The report said the Canadian industry’s revenues and costs are both expected to rise by an average 20 percent annually over the next four years, while profit margins will close in on their long-term average, settling at 15.3 percent in 2013.

Costs not expected to stay down

Crawford said the decline in drilling activity will keep cost growth to a minimum, but he doubts that the significant decrease in many key inputs will continue.

“Going forward, costs will resume their frantic pace of increase,” he said. “Companies delayed projects in the hope that costs would come down … and they did. Unfortunately, costs will start to rise quickly again once prices return to profitable levels and construction begins in earnest industry wide.”

The board does not expect the labor shortage in Western Canada will be solved any time soon and expects competition for workers will drive industry wage growth to 4.2 percent a year on average to 2013.

Capital costs will match the surge in investment and materials costs will rise at the same pace as revenues, reaching C$177 billion in 2012— up 150 percent over four years.

Crawford said oil prices over the near-term will be determined by a “mix of fundamental factors and the whims of the financial markets.

“Still, the recent narrowing of the contango (the difference between the spot price and the higher future price) would suggest that oil prices are not expected to take off in the next 12 months … and adequate supply to satisfy weak demand should help keep the appreciation of oil prices slow over the medium term,” he said.

As a result, the board forecasts the WTI price will average $61.74 this year, rising to $76.89 by the end of 2010.

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