Canada’s oil sands producers are in a unique category of having a large reserve base that doesn’t require capital spending to maintain but is hugely capital intensive to develop.hanhanpeggy/Getty Images/iStockphoto
The two-year oil price downturn has starved the global industry of capital investment that is needed to maintain reserves and production, setting the stage for a potential price spike when rising demand eliminates the existing glut, analysts said on Wednesday.
Stung by depressed prices, the global industry outside the Middle East cut capital expenditures by 25 per cent in 2015 and by another 27 per cent this year, Deloitte LLP's Center for Energy Solutions said in a report on Tuesday.
"These cuts have reduced spending to below the minimum required levels to offset resource depletion, let alone meet any expected growth," it said.
"This mismatch, or underinvestment, points toward a looming problem of sustaining current production levels and adding new capacity, which will likely be apparent three to five years from now."
After breaching the $50 (U.S.) a barrel level late last month, crude prices have lost their momentum despite ongoing disruptions to supply in Canada, Nigeria and Venezuela. On Wednesday, West Texas Intermediate fell 48 cents to $48.01 a barrel, its lowest close since May 20. Goldman Sachs analysts said it would take "additional significant disruptions" in production for prices to climb above $50 and remain there.
At the current price range, companies are unlikely to boost capital spending.
Since 2014, the Edinburgh-based research company Wood Mackenzie has slashed its forecast for global upstream expenditures between 2015 and 2020 by 22 per cent – meaning a decline of $1-trillion over the period, the company said Wednesday.
Wood Mackenzie expects further spending cuts this year as more projects are dropped and companies struggle to break even.
"Virtually every oil-producing country has seen some form of capex cuts," the company's principal analyst, Malcolm Dickson, said in a release. The steepest decline was in the United States, where forecast capital spending was cut by half in 2016 and 2017, eliminating $125-billion in projected spending from what had been the fastest-growing producer of oil and gas in the world.
In its medium-term oil market report, the International Energy Agency warned earlier this year that the underinvestment creates a risk of a dramatic increase in crude prices around 2020 that would be "as potentially destabilizing as the sharp oil price fall has proved to be."
Over the past 10 years, the global industry employed 80 per cent of its capital expenditure just to replace reserves, while 20 per cent was aimed at production growth, Deloitte's Center for Energy Solutions said. "There just not enough capital available to sustain reserve positions" both for oil and natural gas, the centre's executive director, Andrew Slaughter, said in an interview. "Even if you don't allow for growth, there's not enough to maintain reserves, and that puts a squeeze on the whole sector over time."
Mr. Slaughter noted that many cash-strapped companies have competing needs for their capital, including paying down debt to repair their balance sheets and maintaining dividend payments to shareholders.
Canada's oil sands producers are in a rather unique category of having a large reserve base that doesn't require capital spending to maintain – unlike deep-water assets – but is hugely capital intensive to develop.
The oil sands have a "bit of a buffer" with projects that were begun prior to the price slump and will be completed over the next 18 months, and the IEA said Canada would lead non-OPEC production growth next year. But after that, companies will be reluctant to allocate capital to capital-intensive projects with long lead times, Mr. Slaughter said.
Only a handful of oil sands mega-projects have withstood the two-year crude rout. They include Suncor Energy Inc.'s $15-billion (Canadian) Fort Hills mine, where construction started before prices sank, and a multibillion-dollar expansion under way at Canadian Natural Resources Ltd.'s Horizon bitumen mine.
While producers have managed to push down development costs as the downturn intensified, the overall trend is away from projects that require billions of dollars and take years to generate cash flow.
Husky Energy Inc. has said its heavy-oil projects in west-central Saskatchewan can be brought online within two years. The company says it can build a 10,000-barrel-a-day project for about $350-million, a fraction of what it costs to develop a new steam-driven oil sands plant.
The oil crash "has caused the entire industry to reassess its willingness to invest in long-cycle megaprojects," Husky chief operating officer Rob Peabody told investors earlier this month.