More than usual, there is no consensus available for those seeking guidance in the world’s storm-tossed crude markets.
In two of the latest assessments, Citigroup reckons that US$20 a barrel is on the horizon, while the International Energy Agency forecasts that a “market rebalancing will likely occur relatively swiftly” - a theory that gained traction as oil edged returned to US$60 for the first time this year.
For operators in the big-ticket oil sands business of Alberta those extremes are forcing the players to go with their best instincts and whatever data they can gather, especially since most producers need upwards of US$80 for a project to make sense.
Upside hope from Suncor
The result is a mixed bag of decision making, by far the bulk of it tilting toward the negative, although Suncor Energy, easily the biggest producer of crude bitumen, has offered some upside hope.
It might have been expected to put up the shutters for the time being, having reported an 81 percent drop in its fourth quarter earnings to C$84 million from C$443 million a year earlier, and warning of C$700 million cuts to “discretionary growth capital” spending this year.
Not quite. The big company, which runs a full chain of businesses from the upstream to gasoline pumps, has chosen to ride out the storm and complete two of its big ticket ventures.
But Suncor has also removed C$1 billion from its capital budget - effectively copying two of its peers, Cenovus Energy and Canadian Oil Sands - deferred a final decision on a 20,000 barrel per day expansion of its Fort MacKay River thermal project and postponed additions to its White Rose development offshore Newfoundland.
At the same time it is protecting its “big strategic growth projects,” said Chief Executive Officer Steve Williams, notably its C$13.5 billion Fort Hills oil sands mine, targeting first oil in 2017.
It will spend as much as C$1.6 billion this year on the 160,000 bpd project, which it operates through a 60 percent stake, in partnership with France’s Total and Teck Resources.
That move is partly pinned on what it believes will be spinoff benefits from a cooling demand for labor and materials in northern Alberta.
Williams said Suncor will continue work on Fort Hills and its stake the ExxonMobil-led Hebron venture offshore Newfoundland, “for as long as we reasonably can. And right now our judgment is that we can still go ahead with those.”
Cenovus cuts 15%
Cenovus, in contrast, has finally cracked in the face of so much uncertainty, cutting 15 percent of its workforce, or 1,000 jobs, freezing salary hikes and eliminating discretionary spending, in making its second round of budget cuts.
The company’s fourth quarter loss ballooned to C$472 million from C$58 million a year earlier.
“These are challenging times for the oil and gas industry,” said Chief Executive Officer Brian Ferguson. “Cenovus is taking steps to ensure we remain strong during this market downturn.”
Todd Hirsch, chief economist at Calgary-based ATB Financial, wrote in the Globe and Mail that adjusting to US$50 oil may require a pullback from average wages of C$2,234 a week (currently the highest in Canada), and put similar pressure on engineering and service costs.
“Through all of it - as difficult as it will be for many individuals - the industry will improve efficiency and come out in much healthier shape,” he said. “There’s no better time to control cost and increase efficiency than when commodity prices have dealt you a nasty blow.”
Precision loses C$114M
Precision Drilling, a strong barometer of upstream confidence in Canada and the United States, lost C$114 million in the fourth quarter compared with a C$68 million profit a year earlier.
Kevin Neveu, the contractor’s chief executive officer, said the slide in oil prices over the past eight months “has been severe and swift,” reducing the number of rigs Precision has operating to fewer than 200 from 250 at the same time in 2014.
He said the latest downturn differs from that in 2008-09 in two ways: Precision’s Canadian customers have been swifter to cut first-quarter drilling activity, normally the busiest time of year, and North American customers have been faster and more aggressive in demanding price reductions.
Precision has decommissioned 19 rigs in Canada and 10 in the United States, plus 35 service rigs, while reducing its overall rig count to 313 from 327.
The Canadian Association of Oilwell Drilling Contractors has predicted the average tally of active rigs this year will be down 167, resulting in a loss of 23,000 direct and indirect jobs. That outlook was confirmed Feb. 13 when Statistics Canada, a federal agency, said 13,000 jobs have been eliminated in the natural resource sector in the past six months.
Alberta cuts 9%
Faced with these and other grim numbers, Alberta Premier Jim Prentice has decided he can no longer dither, announcing a 9 percent cut in program spending across the board to counter forecasts of a C$7 billion shortfall in each of the next three years.
“Three years of doing nothing would put us almost C$20 billion in debt on the operating side,” said Finance Minister Robin Campbell. “We’re not about to see that happen.”
Normally, Alberta would approve an increase of 4 percent to accommodate population increases plus inflation, but that has been scrapped.
Prentice said the latest estimate from his government’s economists put the price of West Texas Intermediate crude at US$51.24 for the 2015-16 fiscal year, followed by US$62.17 and US$75 in the next two years.
The Conference Board of Canada predicts a C$40 billion drop in Canadian petroleum industry revenues this year - others are counting on C$45 billion - while the slowdown shows early signs of taking its toll in Canada’s manufacturing sector as orders for pipelines and other infrastructure take a dive.
Citigroup has offered one of the gloomiest outlooks, with Edward Morse, the firm's global head of commodity research, suggesting it is “exceedingly unlikely that OPEC will return to its old way of doing business.”
“While many analysts have seen in past market crises ‘the end of OPEC,’ this time around might well be different,” he wrote, especially given that the U.S., Brazil and Russia are continuing to pump oil at record levels, while Saudi Arabia, Iraq and Iran fight to maintain market share by cutting prices to Asia. As a result, the market is oversupplied and storage tanks are topping out.
The IEA predicts Canada’s crude production could still reach 5 million bpd by 2020, up 810,000 bpd from 2014, but 430,000 bpd below its previous forecast.
Globally, IEA expects global output will hit 103.2 million bpd by the end of the decade, a 5.2 million bpd increase, but it predicts annual growth will be held to about 860,000 bpd or half the increase in 2014.
Noting that the oil price slump will hit Canada’s “main sources for growth - oil sands projects,” it suggested spending cuts will mostly affect projects planned to start-up beyond mid-2016.
Because Canada’s growth is “driven by projects with long payback periods, companies will be much more restrained in committing cash to fund expensive projects in the current price environment,” the agency said.
“Producers will instead be incentivized to maximize output in a bid to recoup investment costs,” the IEA said. “New projects, on the other hand, are unlikely to be sanctioned and will likely be delayed.”
The end result from all the conjecture will be similar to previous downturns, with the big players in Canada hoping that their internal guesswork will help keep them above water, even if they do have to engage in extreme dog paddling beneath the surface.
