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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The collapse of crude-oil prices is hurting Western Canadian oil-sands producers and their service companies more than their U.S. counterparts. Oil-sands projects have higher capital costs than U.S. drillers, and the crude produced from those projects sells for far less than West Texas Intermediate (WTI), the benchmark for U.S. light sweet crude oil. As a result, 21 oil-sands projects in Western Canada that were scheduled to begin construction this year have been cancelled or placed on hold, according to Industrial Info's North American Industrial Project Database. The total investment value (TIV) of these 21 projects is about $9 billion.
The benchmark Western Canadian oil sands benchmark, Western Canadian Select (WCS), traditionally has sold at a steep discount to WTI and Brent, a global benchmark crude. In early 2013, WCS sold at a $60 per barrel discount to Brent and a $35 per barrel discount to WTI, according to data from the Canadian Association of Petroleum Producers (CAPP) (Calgary, Alberta). More recently, those discounts have narrowed to about $15 to $20 per barrel in early 2015.
Click on the image at right to see a comparison of WCS to other benchmark crudes from 2010 through 2014.
"The dramatic drop in world crude-oil prices has had quite noticeable impacts on Western Canadian oil producers," said Greg Stringham, CAPP's vice president of markets and oil sands. Conventional drillers have reacted quickly to ramp down production. And oil-sands producers have tender to defer or cancel grassroot projects. For oil-sands producers in Western Canada, there has been a shift from developing grassroot projects to expansions of existing projects.
As a whole, the Canadian oil industry will lower its capital outlays by about $22 billion this year when compared with 2014, Stringham said, estimating investments will fall from about $57.3 billion to about $35.3 billion. The industry's revenue will fall about 40% this year when compared with 2014. Drilling activity, mainly among conventional producers, will be cut by about 45%: only about 5,000 wells will be drilled in Canada this year, down from about 10,000 in 2014.
"Drilling is falling dramatically because the cash flow simply isn't there," Stringham said.
Employment in Alberta's oil industry fell about 18% during the first six months of 2015, from about 200,000 workers to about 165,000, he said. The job losses include about 25,000 oilfield service workers and 5,000 to 10,000 employees of oil companies. On a broader basis, across all of Canada, job losses could be even more severe. He cited a projection from a human resources organization that direct and indirect employment in Canada's oil business will fall from 700,000 to 515,000 this year, a 26% decline.
But like its U.S. counterpart, Canada's oil industry--oil sands producers as well as conventional producers--expects to increase crude oil production this year. As producers and oilfield services companies gain experience in extracting oil from unconventional reservoirs, they are able to produce more oil at less cost. Also, companies are being more conservative in their investment decisions. For more on this issue, see July 16, 2015, article - Efficiency Gains Keep Oil & Gas Production Rising in the Face of Lower Prices; May 21, 2015, article - Chesapeake Energy Spends Less to Produce More Oil & Gas; March 9, 2015, article - Gulfport Energy: Production in Utica to Continue Increasing, Despite Sharply Lower Capital Spending for 2015; and March 6, 2015, article - PDC Energy's 2015 Outlook: Spend Less, Produce More.
Recently, CAPP projected Canadian companies will produce about 3.89 million barrels per day (BBL/d) of crude oil this year, nearly all of it from Western Canada. That's a gain of about 15,000 BBL/d over 2014 production. Last year, Western Canada produced about 3.5 million BBL/d, of which 2.2 million BBL/d came from oil sands production and 1.4 million BBL/d came from conventional means of production.
In its just-released study, "Crude Oil: Forecast, Markets & Transportation," CAPP predicted Canada's overall crude-oil production will increase to about 5.33 million BBL/d by 2030, with Western Canadian oil sands accounting for 4.25 million BBL/d of that total.
"Oil sands production will drive the overall increase in production, which is expected to grow on average by 168,000 BBL/d for the next five years," the study said. That estimate referred only to projects that currently are operating or under construction. "Growth" projects, those not yet operating or under construction, don't begin to make a significant contribution to Western Canadian production for about a decade, according to the new study.
In CAPP's prior crude oil forecast, when WCS prices about averaged about $75 per barrel, nearly $35 more than they average currently, the group predicted crude oil production from Western Canada's oil sands would rise to about 5.4 million BBL/d by 2030. The sharp decline in WCS crude-oil prices over the last year cut projected 2030 production from Western Canada's oil sands producers by about 1.4 million BBL/d.
Click on the image at right to see CAPP's crude-oil production estimate for Western Canada. Last year's analysis saw oil-sands production reaching about 6.8 million BBL/d in 2030.
Canada has an estimated 173 billion barrels of oil, nearly all of which lie in the country's oil-sands deposits in Alberta. CAPP's lowered production forecast for 2030 is largely the result of several large proposed projects being placed on hold or cancelled this year. Some of the largest projects placed on hold include:
"I can tell you the well-optimization people are fully employed," continued Salkeld, whose trade group represents an estimated 70,000 oilfield service workers. "Companies are trying to optimize their production from existing projects. Things are moving forward, just not as fast as they had been. Companies are drilling fewer wells but more laterals," just as they as in the U.S.
He predicted only 160 rigs are operating right now, a 50% decline from a year ago. Producers are routinely asking for 30% discounts on service contracts. Day rates for rig rentals have fallen significantly, Salkeld added: "It's not so much a price war as it is a cost war, and our members believe things will get worse before they get better.".
"We'll come through this, and the companies that make it through will be leaner, more innovative, more competitive and healthier," Salkeld said. "But getting through the decline is really hard. We're really hurting bad."
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
The benchmark Western Canadian oil sands benchmark, Western Canadian Select (WCS), traditionally has sold at a steep discount to WTI and Brent, a global benchmark crude. In early 2013, WCS sold at a $60 per barrel discount to Brent and a $35 per barrel discount to WTI, according to data from the Canadian Association of Petroleum Producers (CAPP) (Calgary, Alberta). More recently, those discounts have narrowed to about $15 to $20 per barrel in early 2015.
Click on the image at right to see a comparison of WCS to other benchmark crudes from 2010 through 2014."The dramatic drop in world crude-oil prices has had quite noticeable impacts on Western Canadian oil producers," said Greg Stringham, CAPP's vice president of markets and oil sands. Conventional drillers have reacted quickly to ramp down production. And oil-sands producers have tender to defer or cancel grassroot projects. For oil-sands producers in Western Canada, there has been a shift from developing grassroot projects to expansions of existing projects.
As a whole, the Canadian oil industry will lower its capital outlays by about $22 billion this year when compared with 2014, Stringham said, estimating investments will fall from about $57.3 billion to about $35.3 billion. The industry's revenue will fall about 40% this year when compared with 2014. Drilling activity, mainly among conventional producers, will be cut by about 45%: only about 5,000 wells will be drilled in Canada this year, down from about 10,000 in 2014.
"Drilling is falling dramatically because the cash flow simply isn't there," Stringham said.
Employment in Alberta's oil industry fell about 18% during the first six months of 2015, from about 200,000 workers to about 165,000, he said. The job losses include about 25,000 oilfield service workers and 5,000 to 10,000 employees of oil companies. On a broader basis, across all of Canada, job losses could be even more severe. He cited a projection from a human resources organization that direct and indirect employment in Canada's oil business will fall from 700,000 to 515,000 this year, a 26% decline.
But like its U.S. counterpart, Canada's oil industry--oil sands producers as well as conventional producers--expects to increase crude oil production this year. As producers and oilfield services companies gain experience in extracting oil from unconventional reservoirs, they are able to produce more oil at less cost. Also, companies are being more conservative in their investment decisions. For more on this issue, see July 16, 2015, article - Efficiency Gains Keep Oil & Gas Production Rising in the Face of Lower Prices; May 21, 2015, article - Chesapeake Energy Spends Less to Produce More Oil & Gas; March 9, 2015, article - Gulfport Energy: Production in Utica to Continue Increasing, Despite Sharply Lower Capital Spending for 2015; and March 6, 2015, article - PDC Energy's 2015 Outlook: Spend Less, Produce More.
Recently, CAPP projected Canadian companies will produce about 3.89 million barrels per day (BBL/d) of crude oil this year, nearly all of it from Western Canada. That's a gain of about 15,000 BBL/d over 2014 production. Last year, Western Canada produced about 3.5 million BBL/d, of which 2.2 million BBL/d came from oil sands production and 1.4 million BBL/d came from conventional means of production.
In its just-released study, "Crude Oil: Forecast, Markets & Transportation," CAPP predicted Canada's overall crude-oil production will increase to about 5.33 million BBL/d by 2030, with Western Canadian oil sands accounting for 4.25 million BBL/d of that total.
"Oil sands production will drive the overall increase in production, which is expected to grow on average by 168,000 BBL/d for the next five years," the study said. That estimate referred only to projects that currently are operating or under construction. "Growth" projects, those not yet operating or under construction, don't begin to make a significant contribution to Western Canadian production for about a decade, according to the new study.
In CAPP's prior crude oil forecast, when WCS prices about averaged about $75 per barrel, nearly $35 more than they average currently, the group predicted crude oil production from Western Canada's oil sands would rise to about 5.4 million BBL/d by 2030. The sharp decline in WCS crude-oil prices over the last year cut projected 2030 production from Western Canada's oil sands producers by about 1.4 million BBL/d.
Click on the image at right to see CAPP's crude-oil production estimate for Western Canada. Last year's analysis saw oil-sands production reaching about 6.8 million BBL/d in 2030.Canada has an estimated 173 billion barrels of oil, nearly all of which lie in the country's oil-sands deposits in Alberta. CAPP's lowered production forecast for 2030 is largely the result of several large proposed projects being placed on hold or cancelled this year. Some of the largest projects placed on hold include:
- Fort McMurray Oil Sands Upgrader Phase 5, a $2.5 billion plant expansion under development by Canadian Natural Resources Limited (NYSE:CNQ) (Calgary, Alberta). This project would expand an existing 415,000-BBL/d bitumen upgrader to 577,000 BBL/d, which would increase the plant's overall synthetic crude oil production to 497,000 BBL/d. Construction was scheduled to begin in early 2015, but it was placed on hold due to market conditions.
- Fort McMurray Terre de Grace Upgrader, a $2 billion grassroot project, involves construction of a plant capable of upgrading 30,000 to 40,000 BBL/d of bitumen to produce up to 33,600 BBL/d of synthetic crude oil. This project is being developed by BP Canada Energy Company (Calgary, Alberta), a unit of BP plc (NYSE:BP) (London, England) and Value Creation Incorporated (Calgary). This project was scheduled to begin construction in April 2015 and be completed in mid-2017, but the developer has not yet rescheduled the kick-off date.
"I can tell you the well-optimization people are fully employed," continued Salkeld, whose trade group represents an estimated 70,000 oilfield service workers. "Companies are trying to optimize their production from existing projects. Things are moving forward, just not as fast as they had been. Companies are drilling fewer wells but more laterals," just as they as in the U.S.
He predicted only 160 rigs are operating right now, a 50% decline from a year ago. Producers are routinely asking for 30% discounts on service contracts. Day rates for rig rentals have fallen significantly, Salkeld added: "It's not so much a price war as it is a cost war, and our members believe things will get worse before they get better.".
"We'll come through this, and the companies that make it through will be leaner, more innovative, more competitive and healthier," Salkeld said. "But getting through the decline is really hard. We're really hurting bad."
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
