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Jittery mood in Canada All sectors brace for prolonged oil slump; one voice suggests US$30 oil possible Gary Park For Petroleum News
The easy part of the debate over the future of oil prices seems to have been resolved in Canada.
From all angles - producers, governments and analysts - there is a strong consensus that the slump will be lengthy.
What they can’t agree on is how low prices will slide and what the impact will be on upstream operations and public revenues.
But one of the most trusted voices in the Canadian oil patch has caused a stir by forecasting that the industry faces a year of “tough sloughing,” with many projects postponed, as prices spiral down to US$30 per barrel, then working their way back to stabilizing around US$70-US$75.
Murray Edwards, who has joined the ranks of billionaires through his astute investments and guidance of companies, including in his role as chairman of Canadian Natural Resources, said that even if prices drop below the US$35 level that was fleetingly experienced in 2008 they will not stay that low for long “because you will see increased demand and supply.” He said OPEC’s rejection of production cuts means “we’re going to really have to find ways to redo our business if we’re going to remain competitive in this low-price environment.
“In the short-term, what you’re going to see is projects that are already underway ... move to completion, but in the current price environment ... you will see a real muting or reduction or deferment of future oil sands projects until you get more stability. And I think that may be what OPEC is wanting to achieve.”
More supply than demand He said that “right now we have more supply than we have demand. The market now is going to find a price which best reflects what it costs to produce a barrel of oil ... nothing solves low prices like low prices.”
Edwards also said he expects there will be a slowdown among non-oil sands producers such as those in the United States and Canadian shale oil sectors.
However, he said Canadian Natural will continue with its four-month hiring freeze, but will not downsize “because loyalty and employees are very important.”
Edwards also urged the Alberta government to avoid changing its regulatory framework by adding “unnecessary red tape or burdens that would make us more cost uncompetitive.”
Capital budget based on US$81 In setting a capital budget of C$8.6 billion for 2015 based on oil averaging US$81 for West Texas Intermediate, Canadian Natural has listed C$2 billion of work as discretionary, although that will not affect work on key growth projects such as expansion of the company’s Horizon oil sands mine, he said.
Despite a darkening mood within the Canadian industry, Edwards pointed to brighter long-term outlook by predicting that efforts to build new pipelines, such as TransCanada’s Keystone XL and Energy East, will continue because they represents a 30- to 50-year opportunity.
Alberta looking at US$65-US$75 Alberta Premier Jim Prentice told a business luncheon that his government will base its spending for the rest of 2014 on oil prices of US$65-US$75.
That came two days after Alberta Finance Minister Robin Campbell said the province expects to post a C$933 million budget surplus for 2014-15, although Prentice warned there could be a period of belt tightening as he lowered Alberta’s forecast oil price to US$65-US$75 for the remaining four months of the fiscal year from the earlier target of US$75 which he said could translate in cut in oil royalties of C$1 billion to C$4 billion.
He said that even if Alberta ended the budget year with a deficit of C$4 billion his government will protect core services.
“We could lay off every single member of the civil service and it wouldn’t fix he deficit,” he said.
For Prentice the most important goal is to “get (Alberta) off the oil train. We have to get to a position where we’re not listening to OPEC to decide how many schools we’re going to build.”
Economist questions other sources But Robert Kavic, senior economist at the Bank of Montreal, said Alberta will never find it easy to develop new sources of revenue.
“They’ve been talking about that as long as I can remember,” he said. “It’s just the nature of the game. It’s an oil-driven economy.”
Patricia Mohr, a commodities analyst at Scotiabank, said an analysis by her bank showed that oil plays in Western Canada “are on average lower-cost than in the United States, partly due to royalty credits and a more flexible royalty system.”
“While several senior and integrated oil producers have indicated little scaling back in their capital spending intentions, junior oil producers face a tougher funding environment,” she said, suggesting that drilling activity in Western Canada could drop by 15 percent in 2015.
Canada’s Finance Minister Joe Oliver was quick to raise a warning flag, suggesting that the loss of revenues from oil exports, which account for 15 percent of Canada’s trade, could mean planned tax cuts or new spending will be shelved.
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