Canada’s federal energy regulator has delivered a sharp blow to the oil production outlook at the same time Imperial Oil, and its U.S. parent ExxonMobil, have compounded the bleak prospects by warning they may be forced to downgrade billions of barrels of oil sands reserves.
The National Energy Board revised its long-term projection for oil prices and Canadian production in a drastic overhaul of forecasts it made only nine months ago.
It estimates Canadian production will grow from 4 million barrels per day in 2015 to 5.7 million bpd by 2050, 391,000 bps less than what it estimated in January, while its inflation-adjusted price target has been set at US$68 a barrel by 2020 and US$90 by 2040, US$12 and US$17 lower than its earlier forecast.
Shelley Milutinovic, chief economist at the NEB, said a lot of the revisions reflect the industry’s ability to sustain production at lower prices, noting that large volumes are available globally with prices in the US$40-US$60 range.
In addition, she said, climate policies are changing “very, very quickly” and present a “very fast-moving target” for forecasters.
Kearl oil sands
With the oil price downturn now entering its third year, the pain is being felt by Imperial (69.6 percent owned by ExxonMobil) and ExxonMobil, which have spent C$21.8 billion developing the Kearl oil sands operation in northeastern Alberta.
The project was originally expected to add 300,000 bpd to Alberta’s oil sands output of 2 million bpd by the end of 2014. Instead it reached only 169,000 bpd in the first nine months of this year.
The two companies indicated they may have to drastically slash their “proved” bitumen reserves at Kearl, while Imperial said it may have to reduce the numbers at its nearby Cold Lake project.
Imperial said 2.6 billion barrels at Kearl could be removed from the proved category, whole ExxonMobil, which owns 29 percent of Kearl, said 2.6 billion barrels could be “de-booked.”
The resulting write-downs would represent up to 71 percent of the proved oil and gas reserves Imperial posted a year ago.
But both companies said the reserves could be returned to the proved category if process recovered or there was a technological breakthrough at Kearl that lowered operating costs.
Majors pulling out
Even if an oil price recovery does enter the realm of profitability in the oil sands, the sector will have to contend with a radically changed environment, highlighted by a pullout of global majors such as Total, Statoil, ConocoPhillips, BP, Chevron and Repsol.
Kevin Birn, director of North American crude oil markets at energy consultancy IHS Energy, said a number of projects under construction are proceeding to completion, adding 500,000 bpd of new output by 2020.
“But the lack of investment since 2014 in new projects means we will have lower supply additions until well on the other side of 2020,” he told the Financial Post.
That pins the hopes for next decade on the handful of Canadian-controlled majors who are the bulwarks of the oil sands, notably Imperial, Suncor Energy, Canadian Natural Resources and Cenovus Energy.
Cenovus Chief Executive Officer Brian Ferguson takes a stab at an upbeat assessment, noting that even his company’s lowered capital spending this year reflects cost efficiencies being achieved and not an alteration of its work scope.
He said Cenovus has reached the point where no further layoffs are planned after a one-third reduction in the payroll.
“As it relates to the commodity cycle, I think the worst is behind us,” Ferguson said. “I think the (price) trajectory is going to be choppy and volatile and I think we’ve got to have a robust business model in the US$55 range.”
Steve Williams, chief executive officer at Suncor, was emphatic that his company has no imminent plans for mergers or acquisitions, rejecting a spate of recent rumors as “overcooked ... we’re not out to build an empire or grow for the sake of growing.”
