OILPATCH RECOVERY ON HORIZON
- 5 Oct 2016
- Calgary Herald
- CHRIS VARCOE
OILPATCH RECOVERY ON HORIZON
Cautious optimism for rebound in oil price, though challenges remain
The reality is it was a really tough year, no way around that. It’s the kind of year where we’re starting to see the bottom of the cycle.
As the song goes, sometimes you’re the windshield, sometimes you’re the bug.
Canada’s oil industry has definitely been the bug for the past two years, mowed down by dismal crude prices, big losses and a pile of pink slips.
Next year, however, the tables could start to turn, with the sector splattering a few obstacles in its path if — and that’s the key qualifier — oil prices finally rebound.
Two examinations Tuesday of Canada’s oilpatch painted the contrasting picture of the industry’s woes in 2016, and its gradual road to recovery next year. First comes the ugly part. The entire oil sector in Canada is expected to absorb a pre-tax loss of $10 billion this year, according to a new Conference Board of Canada report.
That’s only slightly better than the $11.4 billion it hemorrhaged in 2015.
It’s also the first time since the think tank started collecting data in 1987 that it has seen such a large drop in profits in back-toback years.
The study, which examined the oilsands, offshore and conventional oil business in Canada, predicts employment by petroleum producers will fall by almost 11,000 positions this year. And that doesn’t account for the thousands of jobs lost in the service sector or related industries. With crude prices tanking below US$30 a barrel last February and closing Tuesday at $48.69 on the New York Mercantile Exchange, total revenue for Canadian oil producers is forecast to decline to $52 billion, down 21 per cent from 2015.
For a point of reference, overall oil industry revenue towered above $90 billion annually between 2012 and 2014.
With cash flow levels falling due to low oil prices, capital spending by producers has shrunk, from $62 billion in 2014 to less than half that mark this year — $29 billion — according to report author Carlos Murillo.
Add in the impact of the spring wildfires in Fort McMurray and lower investment in conventional oil exploration, and overall crude production in the country will fall for the first time since 2008.
“The reality is it was a really tough year, no way around that,” Murillo, an economist with the Conference Board, said in an interview. “It’s the kind of year where we’re starting to see the bottom of the cycle.”
But Murillo expects the industry will still be digesting the heartburn caused by a prolonged downturn into 2017. Capital spending is expected to dip next year to $24 billion, even with higher oil prices anticipated.
He sees crude prices slowly recovering to average US$54 a barrel for benchmark West Texas Intermediate crude in 2017, before ramping up to $67 in 2020.
The Conference Board forecasts total oil industry profits of $309 million next year and $2 billion in 2018.
However, even with a tentative deal by the Organization of the Petroleum Exporting Countries last week to cap its production, Murillo believes relatively high oil inventories, incoming carbon policies and an uncertain global economic outlook pose potential challenges.
“It almost seems like the (OPEC) agreement is rather symbolic,” said Murillo. “It still looks like the market will not be able to balance until midway next year.” That’s one view. Another forecast, presented Tuesday by commodities analyst Martin King of GMP FirstEnergy at the Calgary Petroleum Club, sees the oil market as already being reasonably balanced between supply and demand.
King, director of institutional research at the investment firm, believes we’re in the early stages of a price recovery. GMP FirstEnergy projects oil prices will rebound to US$60 a barrel in 2017, before climbing to $76.50 in 2019.
Global demand for oil is still growing — an estimated 1.4 million barrels a day next year — while non-OPEC supplies are falling. South of the border, U.S. supplies have dropped 730,000 barrels a day from a year ago.
“We’re looking at a situation where there will be just a gradual improvement in prices in the first half of the year, but definitely better in the second half of 2017,” he told reporters after the speech.
The latest OPEC deal is a “wild card” and the big challenges for the cartel — imposing individual country quotas — must be hammered out in the weeks to come.
“Right now I give them a 50-50 chance they can pull this off,” King said.
For the industry, oilsands production is expected to resume growing next year, while some companies are eyeing spending increases.
A handful of companies, such as Whitecap Resources and Crescent Point Energy, have already indicated they will hike exploration and development spending in 2017.
But other executives have urged caution, saying they don’t anticipate a lot more capital being spent until oil prices move firmly into a higher bandwidth.
“I think prices need to be north of $50 for a sustainable industry,” Kevin Neveu, chief executive of Precision Drilling Corp., said in a recent interview.
Another looming question for Canada’s energy sector is the industry’s ability to move its oil to market.
King believes there’s ample pipeline and rail capacity to ship more crude for the next year. But by the middle of 2018, pipeline space will be almost maxed out in Canada.
“It’s once we get in towards the end of next year, into 2018, that’s where we’re probably going to start running out of pipeline