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It was yet another depressing headline congruent with the rest of the bad news bombarding the battered Canadian oilpatch for 15 months. On February 22 Postmedia (National Post, Calgary Herald, Edmonton Journal) carried the headline, “Canadian oil production growth could come to ‘complete standstill,’ IEA warns.” It was based on the Medium-Term Oil Market report released by the International Energy Agency (IEA) on February 21 looking at global crude supply and demand for the next five years through the end of 2021. Based in Paris, the IEA is made up of 29 member countries which fund its research and reports into global energy markets. Members must be oil importers which have demonstrated they have access to a 90-day supply of oil from some source in the event of a major crude supply disruption.
The problem is the headline is not true. At least not for the next three years, which is an eternity for the many exploration and production (E&P) and oilfield services (OFS) companies trying to figure out how to finish 2016 on the right side of the grass. Thanks to oilsands and east coast offshore projects still under construction, Canadian oil output is going to rise by 100,000 barrels per day (b/d) this year, 285,000 b/d in 2017 and 200,000 b/d in 2018, a total of 585,000 b/d. This is more oil than OPEC members Ecuador and Libya averaged in the fourth quarter of 2015.The two big projects which will move the needle on Canadian output the most are Suncor Fort Hills and Hebron, along with several others.
What the IEA actually wrote – which the headline writers apparently missed - was, “We are likely to see continued capacity increases (in Canada in) the near term, with growth slowing considerably, if not coming to a complete standstill, after the projects under construction are completed.” Which is 2019, unless the developers of these projects pull the plug. As awful as things are for most folks and companies working in the upstream oil and gas industry after 15 months of collapsed oil prices, growing oil and liquids production by 13% from about 4.6 million b/d to 5.2 million b/d over the next three years is a problem many oil-producing jurisdictions around the world would love to have. Canada’s contribution to fixing global oversupply in the next three years will be to increase output. You’re welcome. Don’t tell anybody.
In fact, the IEA’s medium-term report shows an optimistic outlook for the next five years as supply and demand fall into line, which should cause prices to rise. Like all forecasters of repute, the IEA really only extrapolates, as opposed to predicts. All the IEA can do is take what it knows today and extrapolate it out into the future. It cannot predict geopolitical events or technological advancements which have not yet taken place. But based on their database and modelling, the IEA report sees the next five years unfolding as follows.
*OPEC actual in 2015. Assumes post-sanctions increase for Iran in 2016 and adjusts for OPEC capacity changes thereafter. **OPEC Natural Gas Liquids
What this data shows is summarized as follows:
Although these figures show general improvement for global oil markets, the IEA is not optimistic about prices writing, “Unless we see an even larger than expected fall in non-OPEC oil production in 2016 and / or a major demand growth spurt, it is hard to see oil prices recovering significantly in the short term from the low levels prevailing at the time of publication of this report.”
That stated, the IEA also cautions, “It is very tempting, but also very dangerous, to declare that we are in a new era of lower oil prices. But at the risk of tempting fate, we must say that today’s oil market conditions do not suggest that prices could recover sharply in the immediate future – unless, of course, there is a major geopolitical event.” The end of this statement underlies the rigidity of forecasting. Analysts cannot predict geopolitical turmoil or other factors but a major event involving one or more major oil producers – a variety of potential outcomes from war to cooperation – could impact supply, demand and price significantly.
The IEA does not publish a price forecast but admits the implications of continued low prices could be as disruptive as high prices were in flooding markets with more crude. The IEA writes, “Another downside to low oil prices is the impact on investment. The IEA has regularly warned of the potential consequences of the 24% fall in investment seen in 2015 and the expected 17% fall in 2016. In today’s oil market there is hardly any spare production capacity other than in Saudi Arabia and Iran and significant investment is required just to maintain existing production before we move on to provide the new capacity needed to meet rising oil demand. The risk of a sharp oil price rise towards the later part of our forecast arising from insufficient investment is potentially (as) destabilizing as the sharp oil price fall has proved to be.”
The two most important pieces of information from the IEA data are that demand will continue to increase at a steady pace and reservoir output will decline. As written above, the two combine to require a minimum of more than 4 million b/d of new production to come on stream each year to meet demand. Where this will come from is not easy to grasp as E&P companies slash capital budgets and spending programs and rigs are racked.
Although the IEA admits the net result of slashed spending could be a sharp oil price spike, in its forecast it assumes the required oil output increases will be there without much explanation about where it will come from. Except it won’t be from Canada in 2019, 2020 and 2021. But if prices rise high enough, new supplies will eventually come to market from somewhere.
What does this mean for Canada? Again, our production is rising for the next three years, so long as the projects that will create the additional output are not cancelled in the way Shell Carmon Creek was mothballed last year. For OFS companies providing production services, the pie will grow. If prices stay the same and production increases, cash flow will rise, increasing the capital available for investment.
History has proven the one thing certain about these figures is they are not correct. Predicting what world oil markets will do five years from now is fraught with risk. Nobody has ever been particularly successful in this exercise. One can only assume that for the 29 sponsoring countries some information is better than none.
But despite the negative headlines and the checkered history of oil forecasts, the IEA figures at least show steady progress in global supply and demand moving into balance. Demand growth will continue as emerging countries industrialize. Supply at current prices is very risky.
If you can’t raise money raise your voice. So on February 17 the Canadian Association of Oilwell Drilling Contractors (CAODC) launched a new public awareness campaign called Oil Respect, “a campaign to empower regular Canadians to voice support for the Canadian oil and gas industry.” CAODC President Mark Scholz said in a news release, “Oil Respect is about respect for the facts, respect for workers, respect for the environment, and respect for an industry that has done so much to provide Canadians with jobs, funding for government services, and a higher standard of living.”
The CAODC announcement also asks the federal and provincial governments to “stand up for Canadian oil and gas development and transportation via pipelines, both across Canada and for export to new markets outside our borders.”
The first Oil Respect speaking engagement will take place February 25 in Red Deer, followed by other events across the country. The CAODC is hoping people will write letters to politicians, engage in social media, show off bumper stickers and in doing so “push back against those who spread misinformation about our industry.” The CAODC also wants to lobby for governments to recognize the 70th anniversary of the Leduc oil discovery – February 13, 2017 – as a national Oil and Gas Awareness Day.
After the introduction of the National Energy Program by Pierre Trudeau’s Liberal government in 1980 and the collapse of oil prices a few years later, western oil workers lost their jobs in droves and began to feel the country was against them. After the high oil prices of the previous decade, there was little sympathy across the country for the plight of previously prosperous petroleum personnel. Back then, a bumper sticker popular in the oilpatch read “Oil Feeds My Family and Pays My Taxes.”
Similar sentiments are percolating again today among the growing numbers of unemployed oil workers as their industry is regularly criticized by fellow Canadians opposed to pipeline construction and even the use of oil as an energy source. This year the CAODC wants people to begin getting involved at multiple levels. You can start by visiting the website
About the only good news created by the oil price collapse is lower fuel prices. But in the country where gasoline was almost free, the party is over. Due to enormous financial difficulties caused by the oil price collapse, in mid-February Venezuela announced fuel prices would increase from 0.097 bolivars per litre to 6.0 bolivars. This was the first retail fuel price increase in 20 years. Based on the current exchange rate, one bolivar buys C$0.22. This raises the price of fuel from two cents per litre to about C$1.32. This is the published exchange rate. The actual exchange rate in this economically distressed country is probably significantly lower.
According to an article in oilprice.com on February 19, the state oil company PDVSA collected only US$77 million for the state’s central bank in January of 2016. For the same month in 2015 the figure was US$815 million. In January of 2014 it was US$3 billion. This explains why Venezuela has been the most vocal OPEC member pushing for production cuts.
Building production facilities and infrastructure is excellent business for OFS. Capital investments which come from other oilfield service companies such as midstream operators or pipeline companies result in OFS activity above the better-known source which is capital and operating spending by E&P companies.
This year even that won’t work. When announcing its fourth quarter financial results on February 19, Canadian pipeline giant Enbridge Inc. revealed about $10 billion worth of capital projects was being delayed by U.S. regulatory reviews. This included the $2.6 billion Sand Piper line to carry oil from North Dakota to Minnesota and the $7.5 billion Line 3 Replacement Project, a major pipeline carrying oil from Hardisty, Alberta to Wisconsin. The problems appear to be caused by regulators in Minnesota. The $7.9 billion Northern Gateway oil pipeline to the west coast has been delayed indefinitely.
In the conference call releasing its financials, Enbridge admitted the Canadian oil pipeline capacity order book dries up in 2019 (see first article above) so the company is examining other opportunities for expansion that don’t involve transporting increased oilsands production.
Oil and gas exploration and production companies have a long list of accounts payable. While the price reductions resulting in OFS staff layoffs are well known, the cash shortage is hitting E&P’s indirect vendors as well. Such is the case for private landowners who rent surface rights access to subsurface mineral rights holders upon which oil and gas companies drill wells, build roads and operate production facilities.
On February 22, the Calgary Herald reported 765 landowners approached the Alberta Surface Rights Board (ASRB) in 2015 seeking compensation. The board told delinquent lessees to pay $1.7 million, the highest figure in many years. At some point, the ASRB can terminate the surface lease and approach the province for the money, after which the province can go after the offending oil company. Some landowners believe they are being subjected to selective punishment. A surface rights lessor in east central Alberta told the newspaper, “I think (the oil industry) thought the big revenues were going to go on forever. They gave a lot of money way to shareholders, and they kept quite a bit for themselves, probably the biggest part. I don’t know how they went from windfall profits to where they are today.”
The answer is the price of oil collapsed. In 2014, ARC Financial Corp. of Calgary estimated total revenue from the sale of oil and gas production in Canada reached a record $149.3 billion. In its February 23 report ARC lowered the 2016 estimate to only $88.2 billion, a $61 billion reduction. Surface rights lessors are joining a long list of employees, OFS companies and other suppliers which are not getting paid what they once did, if they get paid at all.
North American drilling activity measured by the following three key metrics continues to decline. Canada’s rig count is falling steady, while in February of 2014 it was still rising as the winter drilling season progressed. Oil drilling in the U.S. and drilling in North Dakota continue to fall. Whatever brave predictions are being made for production of U.S. light tight oil, it is clear from these figures fewer operators each week can afford to keep drilling for this resource.
FOR FURTHER INFORMATION ON OILFIELD SERVICES CONTACT:David Yager, National Leader, Oilfield Services
Client Groups:Oilfield Services
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