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Alberta on slippery slope Crude markets turmoil raises concern about sands, tight oil capital investments; analyst thinks worst-case scenario will need US$60 prices Gary Park For Petroleum News
The latest round of stomach-churning lurches in stock and crude markets have sent economic and political shockwaves around the globe, forcing the petroleum industry’s big players to ponder heading for high ground by either shelving or scrapping projects.
Assuming oil prices continue to get a severe workout some of the answers will start emerging over the next few months as capital spending plans for 2015 and beyond are unveiled.
In Alberta, which depends for economic activity and growth on one of the largest piles of multibillion-dollar projects in the world, the finger pointing, as it often does in times of a pricing crisis, is being directed at OPEC leader Saudi Arabia which market experts believe would be happy to see prices remain around US$80 a barrel or lower for an extended period.
The Saudis reportedly want to apply the brakes to the production of more costly crudes, notably the Alberta oil sands and U.S. oil from shale.
After the International Energy Agency, IEA, slashed its forecast earlier in October for demand growth and benchmark crude prices slumped to their lowest level in four years, Canada’s Finance Minister Joe Oliver exposed the nervousness within government circles by refusing to forecast where commodity prices were heading.
“They tend to be somewhat volatile and we’re monitoring the situation,” he said of a deteriorating supply-demand picture.
Canada could take big hit That bland assessment was in contrast with a research report by BMO Capital Markets that noted a drop of 22 percent in the price of oil over four months could deliver a C$3 billion hit to the federal government’s bottom line, wiping out a cushion built into the budget forecast to cover unforeseen events, while cooling the Alberta economy which is Canada’s growth engine.
Gene McGillian, an analyst with Tradition Energy, told Bloomberg that the “dual combination of economic fear and ample supplies continues to pressure oil. The market just cannot find bottom.”
As it has done for more than 40 years, OPEC is wielding the biggest stick by allowing prices to tumble to the point where companies blink, with the Saudis ignoring a plea from Venezuela to call an emergency meeting to discuss production cuts by the cartel to raise prices back above US$100.
Development pinned to prices Amid the upheaval, RBC Capital Markets issued a report that pinned concerns over the development of oil sands and shale formations on an “uncertain commodity price landscape.”
However, it suggested the impact on the industry of sub-US$80 oil could take “months” to realize.
“The market is posing the question, at what price do the oil sands and tight oil plays decelerate from a growth perspective?” RBC asked.
The RBC report said US$80 oil would serve as a drag on drilling in shale formations such as the Bakken, Permian and Eagle Ford as producers high-graded their portfolios, but suggested an extended slump from premium prices would take longer to show up in the oil sands.
It said the long lead times for oil sands projects, along with improving heavy oil pricing dynamics, would be unlikely to bring about a rapid change in developments that are under construction.
“Oil sands producers, mindful of their financial positions and large capital outlays associated with developments, would likely adopt a more measured approach when it comes to embarking on new projects,” RBC said.
The report forecast oil sands production will grow by 250,000-275,000 barrels per day in the 2010-20 period, which is more upbeat that the 175,000 bpd forecast by the Canadian Association of Petroleum Producers.
US$100 WTI estimate RBC and the IEA, based on data from the Canadian Energy Research Institute, estimate new oil sands mining projects need West Texas Intermediate prices of US$100 to break even.
Economists with BMO Capital Markets said it would probably take a sustained period of sub-US$80 oil to trigger a widespread dial back or delay in project planning, but noted that even the price slump has prompted Statoil to stall its Corner oil sands project and Total/Suncor Energy to shelve their Joslyn mine.
The IEA has calculated that thermal recovery projects that use pad drilling need an economic threshold of US$85, but RBC, CAPP and some producers have put that breakeven price at US$75.
FirstEnergy Capital analyst Martin King suggested the mid-US$60s is a worst-case scenario, but emphasized that his firm is forecasting WTI prices in the mid-US$90s.
FirstEnergy is not alone. Scotiabank commodities expert Patricia Mohr predicts WTI will average US$99 this year and US$98 in 2015, while Brent will be about US$107 in both years. CIBC expects US$97.50 for WTI this year and US$90 in 2015.
Short-term vs. long-term Newly elected Alberta Premier Jim Prentice, previously one of Canada’s leading bankers, said he will not confuse “short-term market cycles with the long-term economics” of his province’s petroleum industry.
He said that although global oil prices have dropped 25 percent since June, Alberta’s bitumen prices have not fallen nearly as sharply.
“There’s been a softening of the blow, first because of a lower Canadian dollar and secondly because of lower condensate prices,” he said. “Alberta has actually, on a relative basis, held its position much better.”
But Prentice said the current crude price levels have “significant implications” for his province.
He said this is “a time for prudence and caution” for Alberta to ensure its finances “remain in order.”
“Everyone is trying to determine how long this low-price environment will last,” Prentice told the Globe and Mail. “Clearly it will have implications in terms of capital investment decisions in the energy sector.”
One of the best hopes for Alberta is achieving access to tidewater and open tanker routes to new markets, allowing producers to benefit from global prices, he said.
“Once we’re able to secure pipeline access into the Asia-Pacific basin, Canadian crude will essentially become the benchmark standard for the entirety of the basin,” Prentice said.
However, he conceded that the chances of building the Keystone XL, Energy East, Northern Gateway and Trans Mountain expansion pipelines “will take time.”
“They hinge very substantially on our ability to strike partnerships” among provincial governments and with First Nations, he said.
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