|
‘R’ word haunts oil patch Failure of US manufacturing to offset weakness in energy industry is taking a large bite out of Canada’s upstream capital spending GARY PARK For Petroleum News
What has taken the best part of a year to solidify is now rapidly taking shape.
A glut of supply on North American natural gas markets at prices many observers think will last for at least another two years and a fresh swoon in the oil sector have Canada’s upstream industry bracing for a fresh battering.
For economic analysts the petroleum industry’s inability to achieve and hold tight to a balanced market is even forcing some to start thinking about the “R” word as Canada enters its fifth month of below zero-Gross Domestic Product - the first string of declines since the 2008-09 recession began to wind down.
That, along with a near-record trade deficit in May, is spawning talk of a second drop this year in the Bank of Canada’s key interest rate.
The first cut occurred in January when bank Gov. Stephen Poloz said the collapse of global oil prices has set the table for an “atrocious” start to 2015.
What he apparently didn’t anticipate was the prolonged impact and damage to the economy that the energy drubbing would deliver.
Waiting for the positive But the vague outlines that emerged earlier this year are now clearly defined.
Bank of Montreal chief economist Douglas Porter said he originally thought there would be two opposing forces in the Canadian economy - a downward pull from energy on the weak side and a United States-driven lift in manufacturing.
“We certainly got the negative and we’re still waiting for the positive,” he said.
As the wait continues and optimism evaporates, Statistics Canada, a federal government agency, said Canada’s oil and gas stronghold in Alberta is facing an 11 percent decline in private and public capital spending to C$82 billion this year.
It said the conventional oil and gas subsector across Canada faces a decline in capital spending of C$8 billion to C$30.5 billion and the non-conventional subsector is expected to fall by C$5 billion to C$25.1 billion.
Based on its own calculations, the Canadian Association of Petroleum Producers said total capital investment in the industry is targeted at C$45 billion in 2015, off C$28 billion from last year, with the oil sands facing a C$10 billion drop to C$23 billion.
Spillover expected Todd Hirsch, chief economist with ATB Financial, expects the floundering commodity prices will soon start spilling over to construction, machinery and equipment investments.
Dina Ignjatovic, an economist with TD Economics, said expectations that oil prices will hover at current levels for the second half of 2015 and average US$70 a barrel in 2016 will fail to trigger a rebound in investment, unlike the last oil price correction in 2009.
As the oil shock lingers, the International Monetary Fund has pegged Canadian economic growth at 1.5 percent for 2015, down sharply from the 2.2 percent it forecast only three months ago, while projected United States growth was lowered to 2.5 percent from 3.1 percent over the same period.
The IMF listed a “strong downsizing of capital expenditure in the oil sector” as a major factor hurting North American economic activity, but did suggest the “unexpected weakness ... is likely to prove a temporary setback.”
IMF chief economist Olivier Blanchard warned that the Greek crisis “may be a warning” of the ongoing risks to stability and economic growth throughout the world from “debt overhang” that remains a focus at government, corporate and household levels.
Canada’s Finance Minister Joe Oliver, while clinging to his projected surplus of C$1.4 billion for fiscal 2015-16, insisted that virtually all of the economists he consults with see positive growth for the Canadian economy for the calendar year, even though some suggest Canada will be lucky to grow by 1 percent.
The harshest reality in Canada is that 16 megaprojects in the oil sands sector have been cancelled or delayed, compared with only 10 in the rest of the world (although those numbers could be skewed by the fact that state-owned, national oil companies that control 75 percent of the world’s oil production have no obligation to report their plans or budgets).
Communication far from transparent But communication is far from completely transparent in Canada.
TD Securities oilfield services analyst Scott Treadwell told an energy conference earlier in July that “in this market, it doesn’t do producers any good to share any high-level information with service companies.”
He said producers essentially tell the support sector that “things aren’t good and costs need to come down.”
They also tell service companies they are not sure how much drilling they plan to undertake “and then you stop talking ... if you stop talking, the sales guy will keep lowering his price until you say something.”
The resulting squeeze, according to the Canadian Association of Oilwell Drilling Contractors, has seen the number of operating days in the drilling sector drop to 25,000 this year from 50,000 last year, the number of wells drop to 5,500 from 11,000 and the average number of rigs working plummet to 184 from a fleet of 768.
Dan MacDonald, of RBC Dominion Securities, said the number of wells drilled in June was 39 percent below June 2014.
But Rob McNally, chief financial officer for Precision Drilling, one of the largest land drillers in North America, conceded “there is real gamesmanship going on (with clients),” although he said some big customers in the U.S. are still sharing their plans, even though producers in both countries may not actually have a plan because of uncertainty over future commodity prices.
Some room for rig rebound Despite the funk, Precision’s Chief Executive Officer Kevin Neveu told the Globe and Mail there is some room for the North American rig count to rebound now that the “rig count might have dropped a little lower than necessary and our customers have saved more money than they intended.”
However, a strong rig recovery would require prices of US$60-$70 a barrel.
“What we’re doing is staying very ready and working with our customers to make sure high-grade rigs are ready to respond,” Neveu said.
With time to ponder a better future, Cenovus Energy, one of the top oil sands producers, would sooner not see prices return to US$80, executive Vice President Habir Chhina told a Calgary conference earlier in July.
Even in a US$50-$60 world “we got a great opportunity” to cut capital and operating costs by 30 percent.
“The key thing that’s going to happen now, with this downturn, is that the cost structure in the oil sands is going to come down,” he said, suggesting that will make the oil sands competitive against shale oil development in the pursuit of capital.
Chhina even injected a light touch into his remarks by declaring that “except for oil prices and share prices, everything’s working very well.”
MEG Energy Vice President John Rogers said that along with lowering operating costs his company would raise production for the foreseeable future after deliberately cutting spending this year “to regain control over our cash flow.”
| 