Canada's oil industry swoons again with crude below $40/bbl

CALGARY (Bloomberg) -- For Canada’s oil industry, the bad news won’t stop.

 

With OPEC’s decision on Friday to keep pumping oil in the face of a glut and prices for the commodity falling to their lowest level since 2009, Canadian producers are once again faced with the now-familiar problem of how to make fossil fuel extraction in one of the world’s most expensive places to drill profitable. The latest price collapse to less than $40/bbl already means losses for some companies.

 

“Netbacks can be zero or even negative in this price environment,” said Justin Bouchard, an analyst at Desjardins Securities Inc. in Calgary, referring to returns on a barrel of crude after most costs are factored in. “Budgets are as close to the bone as possible and companies are cutting as deeply as they can without shrinking production.”

 

Canada’s oil and gas companies have eliminated at least 40,000 jobs this year, the industry’s lobby group estimates, while companies have curtailed spending. Canadian Natural Resources Ltd., the nation’s largest heavy oil producer, will rely on cash flow to cover its capital spending next year after eliminating C$3.2 billion ($2.4 billion) from its 2015 budget. Blackpearl Resources Inc., a small operator, will spend only C$15 million next year, a fraction of the C$235 million the company spent in 2014.

 

The Standard & Poors/TSX energy sub-index fell 5.4% on Monday. The index was up 0.5% on Tuesday, bringing the year’s decline to 28% as profits collapsed for Canadian oil producers. U.S. benchmark West Texas Intermediate swung between gains and losses Tuesday, with crude for January delivery declining 14 cents, or 0.4%, to settle at $37.51/bbl at on the New York Mercantile Exchange, the lowest settlement since February 2009.

 

Dropping Costs

 

Husky Energy Inc., the Canadian energy company controlled by Hong Kong billionaire Li Ka-Shing, said Tuesday it’s designing its business to operate with $40 U.S. oil for the next two years. The company’s earnings break-even per-barrel point was in the mid-$50s last year for WTI and is in the low-$40s today, it said in a statement outlining its 2016 budget. Husky plans to drop costs below $40 by the end of 2016 and for any new investments, the break-even has to be $30/bbl or less.

 

“We are ultimately in a period of enormous volatility,” Chief Executive Officer Asim Ghosh said on an analyst conference call. “When you look at how the prices have yanked around over the last year, you will basically have to say that anybody who’s erred to the conservative side has probably ended up in a better place than people who have made aggressive planning assumptions.”

 

At Syncrude, the oil-sands mine jointly owned by Canadian Oil Sands Ltd. and six other companies, operating costs fell to C$40.49/bbl in the third quarter, Canadian Oil Sands reported. Costs are forecast to fall to C$37.14/bbl in 2016.

 

Some large companies still have room to breathe at current prices. Suncor Energy Inc.’s operating costs at its oil-sands operations fell to C$27/bbl in the third quarter, while Cenovus Energy Inc.’s operating costs at its Christina Lake site is less than C$10/bbl and its conventional oil costs are just over C$15/bbl.

 

Canadian Natural has lowered operating costs at its Horizon oil-sands mine and upgrader by 27% year-over-year, to C$27.04/bbl in the third quarter. By 2018, the company targets costs below C$20/bbl, Executive Chairman and billionaire investor Murray Edwards said last month at a conference.

 

Cost Curve

 

“By focusing on technology and by focusing on innovation, we think we can move the cost curve to remain competitive as we fight for market share,” Edwards said.

 

Still, to build any steam-assisted or mining operations and include in a return on investment for shareholders requires prices at least twice as high as they are now, according to industry estimates.

 

The low price adds to the industry’s worst year since 2009 after the Alberta government increased corporate taxes, raised the price for carbon in the province and placed a limit on emissions from the oil sands. Changes to the province’s royalty regime are expected in the next month, which may add another burden on an industry that will find it hard to grow after the current round of construction ends.

 

Like all cycles, the current period of lower oil prices and the downturn for Canada’s industry will come to an end, said Desjardins’ Bouchard.

 

“It’s all driven by supply and demand,” Bouchard said. “It will balance itself at some point. But when?”