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Vol. 20, No. 48 Week of November 29, 2015
Providing coverage of Alaska and northern Canada's oil and gas industry

Grim and grimmer

Canadian upstream heading for worst year since ‘85; drilling down 58%

GARY PARK

For Petroleum News

Canada’s upstream oil and natural gas sector is now “facing one of the most difficult times in a generation,” said Mark Scholz, president of the Canadian Association of Oilwell Drilling Contractors.

He said the service sector expects to lose 28,485 jobs over the past two years, or 57 percent of its workforce, as drilling posts a 58 percent decline in 2016 to 4,728 wells, compared with 11,226 in 2014, while the rig fleet is estimated to shrink by 62 units to 696.

CAODC projects that the decline in rig utilization rates will continue through 2016 to average only 22 percent for the year, matching 1983, “one of the worst periods in our history.”

The organization is stepping up its lobbying of the Canadian and provincial governments to delay increases in taxes and other costs, such as royalties and a carbon tax.

“There is incredible uncertainty for investors to put money into Alberta,” said Scholz. “We’ve seen corporate tax hikes, it’s unclear what type of royalty increases we’ll see, and (the industry will have a better understanding) of environmental taxes in the next couple of months.”

Outlook ‘grim’

Brian Krausert, with Beaver Drilling, said the 2016 outlook is “grim, or as we call it in our office, butt ugly. But I know the industry is resilient enough and hopefully we’ll be around next year.”

Greg Ward, with Remote Waste, which treats wastewater for well sites and work camps, admitted “it’s pretty depressing. People are losing their homes, people are losing their livelihoods, people are going to get desperate.”

An early hint of the fallout came from the credit agency TransUnion, which reported a credit and loan delinquency rate of 2.63 percent in the third quarter as Alberta (whose average per head debt load stands at C$27,599) surpassed the Canadian average (of C$24,414).

The only glimmer of hope from major producers came from Suncor Energy, which set a capital budget of C$6.7 billion to C$7.3 billion for 2016, compared with C$5.8 billion-C$6.4 billion in 2015, although its production outlook was cut to 525,000-565,000 barrels of oil equivalent per day from 550,000-595,000 boe per day this year, largely because of maintenance at one of its plants that upgrades oil sands bitumen to synthetic crude.

Canadian Natural Resources expects to lower its capital spending by C$1.5 billion and Royal Dutch Shell, whose Canadian President Lorraine Mitchelmore announced her resignation, has mothballed a major oil sands project and put expansion plans on hold indefinitely while it focuses on cutting operating costs.

Chris Feltin, an analyst at Macquarie Group, said at current oil prices “many plays don’t actually make economic sense, so I think holding production flat with limited capital is probably the best course of action.”

Outside the high-cost oil sands sector, spending is poised to fall by 18 percent in 2016 after dropping by about 35 percent this year, while aggregate spending among the largest oil sands producers could drop by 7 percent next year, he said.

ARC Financial said the price rout has already halted 17 projects that have represented 1.3 million barrels per day of incremental output.

Jackie Forrest, vice president at ARC, said that unless the economics of finishing active projects make sense companies are “just going to hibernate. It’s very hard to live within your cash flow at these prices.”

Looking for ‘sweet spot’

Canada’s Natural Resources Minister Jim Carr said his government is committed to finding a “sweet spot” between advancing its environmental priorities and the concerns of oil and gas producers over prices and pending regulatory changes.

He said the industry has “human dimensions and human consequences, that people are fearful for jobs, investors are looking cautiously at opportunities. But I am hopeful ... we will find the sweet spot that will enable us to move forward in a sustainable way.”

The newly elected Liberal government of Prime Minister Justin Trudeau has already shown its concern by backing away from an earlier pledge to present a national climate change program at the United Nations conference which starts in Paris on Nov. 30.

Environment Minister Catherine McKenna said “the real hard work” of tackling carbon emissions will start 90 days after the Paris talks.

“Everyone realizes we’re all in this together,” she said. “We’re going to figure out what’s a credible plan.”

That will not be easy, based on the findings of a report by the University of Calgary’s School of Public Policy which said the current oil price has more in common with the prolonged slump in the 1980s than more recent crude price stumbles.

The report warned that the economic engine in Alberta could be stalled for “a long time,” with little prospect of a price recovery before the end of this decade.

It said the faltering oil prices of 1997 and 2008 were “demand-driven,” unlike the collapse which started in 1985 and was primarily supply-driven.



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