About the only certainty for the Canadian oil and gas sector is that the number of known unknowns abounds.
Uncertainty has always been a hallmark of the oil industry and the current list of variables is led by particularly volatile crude prices, but also includes the review of oil and gas royalties in Alberta, Ottawa’s plan to roll out a national framework on climate change along with implementation of Alberta’s newly released GHG strategy, and the industry’s enduring concern over access to foreign markets.
It was a second straight year of steep oil price declines in 2015 as crude slumped to its lowest levels since the global financial crisis in 2009 and added clarity may simply reaffirm the bleak outlook for the industry entering 2016.
With Canadian producers and drillers facing what’s been called “one of the most difficult economic times in a generation” significant change is needed — and already underway as the job losses will attest — to address the fundamentals of doing business in a high-cost basin in a low-price environment but there’s tremendous uncertainty over how companies will react and adapt.
Investment firm ARC Financial has calculated revenues for the oil and gas industry in Canada will be $91 billion in 2015 — or almost 40 per cent less than a year earlier.
Bankruptcies are already occurring in the especially grim junior sector.
Capital spending by oil and gas producers in Canada plunged from $81 billion in 2014 to $45 billion in 2015 as West Texas Intermediate crude declined by more than 30 per cent from January and closed 2015 at US$37.04 a barrel. The International Energy Agency conceded in December “there are very few reasons” to expect a price recovery in 2016.
The main energy index on the Toronto Stock Exchange similarly fell by almost 30 per cent in 2015.
During the year, the North American benchmark crude averaged US$48.76 a barrel; or only slightly more than the price WTI has averaged, in today’s dollars, over the previous 50 years. However, after three years of averaging more than US$90 a barrel, WTI hit a recent peak at $107 in June 2014 and has lost approximately 70 per cent of its value since then.
Influential U.S. financial institutions Citigroup and Goldman Sachs have warned crude could retreat into the $20s if the persistent global supply glut increases while Morgan Stanley said in its recent outlook for 2016 that “headwinds growing for 2016 oil” as production continues to defy lower prices and falling rig counts.
The U.S. Energy Information Agency predicts WTI will average $51 a barrel in 2016 but acknowledges that’s “subject to significant uncertainties as the oil market moves toward balance … prices could continue to experience periods of heightened volatility.” In Canada, Scotiabank has warned it expects WTI to average “no more than $40-45 a barrel” in 2016.
The new year will be rife with challenges as a number of key developments occur.
Alberta Premier Rachel Notley delayed the royalty review report scheduled for December to early January to ensure “we don’t kick something out the door that’s not ready” but has already promised no surprises for industry and delayed any changes until January 2o17 as industry adjusts to what’s been a historic downturn.
Notley’s strategy to address greenhouse gas emissions are already announced with a carbon tax, 100-megatonne cap on GHGs from oilsands and the Alberta Energy Regulator assuming responsibility to reduce methane emissions from well sites and oilfield facilities. It remains to be seen what will comprise the national climate strategy Prime Minister Justin Trudeau has promised this spring. He’s said the plan with the provinces will be in place 90 days after the UN climate summit in Paris — so about March 12.
On May 20, the National Energy Board is scheduled to release its recommendations on Kinder Morgan’s plans to twin the existing Trans Mountain oil pipeline from Alberta to suburban Vancouver.
With TransCanada’s Keystone XL pipeline denied in the U.S., Enbridge’s Northern Gateway pipeline facing intense opposition in northern B.C. and TransCanada’s Energy East still early in the NEB’s review process, Trans Mountain’s project is key to the industry’s goal of accessing more global export markets.
In a decision critical to the beleaguered gas industry, the Canadian Environmental Assessment Agency is expected to rule this spring on the application of Malaysia’s Petronas to build a terminal in B.C. to ship liquefied natural gas to Asian markets. A final investment decision from Petronas for the first of the LNG facilities for the West Coast would likely follow government approval.
It will be the oil price that determines the fate of the industry more than anything else.
After effectively scrapping production quotas in December — and with renewed U.S. and Iranian oil exports expected to hit global markets this month — the Organization of Petroleum Exporting Countries is to meet June 2 to discuss the price war orchestrated by Saudi Arabia topush high-cost non-OPEC supply, including the oilsands, out of the market.
In an industry defined by uncertainty, Canadian producers have always known there’s nothing they can do about the price of oil and understood it’s up to them to change with the times to survive.
Stephen Ewart is a Calgary Herald columnist
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