Page 5 - NorthAmOil Week 10

NorthAmOil COMMENTARY NorthAmOil
however, it has no plans to sanction new projects this year under the current price environment.
Cenovus’ announcement came after the com- pany’s shares lost more than half their value on March 9 as oil prices collapsed. An IHS Markit analyst, Kevin Birn, was quoted by the Cana- dian Press as saying others would soon follow in Cenovus’ footsteps.
“Lower prices simply mean they’re generat- ing less revenue and so they’re going to have to pull back on what they were planning to spend initially in the year,” Birn said. “The implications are that could weigh ... probably on the folks that actually do the work in the oilfield – the roads, the pipes and the drilling.”
The move also comes as a blow to the Alberta government’s efforts to encourage more crude- by-rail shipments out of the province as it grap- ples with its shortage of takeaway capacity from the oil sands.
Hard times
Canada’s oil already trades at a discount to West Texas Intermediate (WTI) and in the immediate aftermath of Saudi’s announcement that it would ramp up production, Western Canadian Select (WCS) fell below $20 per barrel.
Canada’s recent experience with an oil price downturn does not bode well given that many companies are worse off financially now than they were during the worst of the 2014-16 slump. During that period, nine new oil sands projects were cancelled. And according to Tudor, Picker- ing, Holt & Co. (TPH), non-oil sands oil output in Western Canada fell by about 140,000 bpd from the end of 2015 to the summer of 2016 as producers stopped spending on new wells.
“Given prevailing rhetoric that Canadian bar- rels trend along the higher end of the cash cost
spectrum, particularly those from the oil sands, investor interest has perked up on the potential for Canada to be among the first to shut in or decline given the rapid decline in crude prices,” TPH wrote in an analyst note.
What next?
Canadian officials have vowed to support the country’s resource-reliant economy through this turbulent time, but it is not yet clear what this means in practice. Canadian Minister of Finance Bill Morneau said he would begin rolling out fis- cal measures this week, which he said would help both employees and employers.
Meanwhile, Alberta Premier Jason Kenney called for a swift and meaningful response to the crisis. Despite pipeline bottlenecks, crude oil is Canada’s largest export, while the energy sector accounts for 10% of the country’s GDP.
The pain will be felt most acutely in Alberta, where the provincial government had budgeted for the new budget year, which begins in April, based on WTI averaging US$58 per barrel. Every drop of $1 per barrel in the average price over the entire year is expected to cost the treasury $355mn in lost revenue.
Kenney said in a speech this week that his government would consider “all options” to respond to the situation.
Much will become clearer over the coming weeks, assuming oil prices remain low. At first glance, it appears that oil companies that are effi- cient and low-cost producers that have hedged a significant proportion of their volumes at higher crude prices will do better than others. As with their counterparts in US shale plays, Canadian producers could be in for a wave of bankruptcies if Saudi and Russia refuse to take steps to prop up the oil price.™
Canadian officials have vowed to support the country’s resource-reliant economy through this turbulent time, but it is not yet clear what this means.
Non-oil sands project were also hit hard the last time oil prices collapsed, and could take a similar – or worse – hit this time.
Week 10 12•March•2020 w w w . N E W S B A S E . c o m
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