Canada’s oilpatch most vulnerable in face of low prices, analysis says
As oil prices dropped again on Monday, a new analysis says Canada’s oilpatch faces the greatest risk of shut-ins if low prices persist.
The drop in price of Western Canadian Select crude on Monday, by more than 25 per cent to under US$9 per barrel, came amid fading market hopes that the world’s energy-producing countries would reach a deal to cut global production in light of reduced demand.
Against this backdrop, analysts at Sanford C. Bernstein & Co. on Monday noted that Canada produces a higher percentage of “marginal barrels” — economists’ term for oil barrels that are most likely to be shut-in if current low-prices persist — than nearly any other country.
“Barring what would be an unprecedented global deal to cut supply, we would expect prices to hover near the level required to incent shut ins,” the Bernstein analysts wrote.
In Canada, the three largest oil producers, Canadian Natural Resources Ltd, Suncor Energy Inc. and Imperial Oil Ltd. collectively control 60 per cent of the country’s marginal barrels, or more than 1.66 million barrels of oil per day.
That means as current prices persist, financial pressure will mount to take those barrels offline.
None of the three companies provided comment for this article.
The Bernstein analysts pointed out that China also has a lot of marginal barrels, but state subsidies mean that crude prices do not necessarily determine whether the oil is produced.
The situation comes as oil prices had rallied late last week after U.S. President Donald Trump suggested Saudi Arabia and Russia were close to finalizing an agreement to end a price war that started weeks ago.
However, the president said he will not mandate U.S. producers to cut output to prop up prices.
On Friday, Saudi Arabia called for energy-producing countries from around the world to co-ordinate global production cuts in light of the reduced demand resulting from COVID -19 lockdown measures.
Such a global coordination would be unprecedented, and it appeared less likely when a meeting of the OPEC+ group, set for Monday, was pushed to Thursday as Russia and Saudi Arabia bickered over who’s to blame for the collapse.
Saudi Arabia has also offered to host a meeting on Friday for G20 energy ministers and members of some other international organizations via video conference.
Greg Priddy, analyst at Stratfor, said the Saudis and Russians want other oil-producing countries to share the burden of rebalancing the market, and he’s not convinced Trump is willing to take on the big U.S. oil companies, “which made their opposition clear” to any cuts.
“U.S. participation in the G-20 ministerial meeting on Friday this week doesn’t mean much unless the Saudis and Russians are satisfied that the burden is being shared fairly,” said Priddy.
“Anything less than a coordinated global cut is going to be disappointing to the market, as further price declines will be necessary to shut in enough output.”
Now, analysts say the world is running out of capacity to store oil while demand remains tepid as much of the world’s industrial activity has slowed or stopped.
Other analysts also took note that the weak price environment is ratcheting up pressure on Canada’s oil sector.
“This was supposed to be the year that Alberta oil producers began to drain their overflowing inventories,” Marc Desormeaux, a senior economist at Scotiabank, wrote on Monday.
Instead, he wrote that “rock-bottom crude values in the near-term would put new pressures on many producers to throttle back production or shut down; limited storage capacity should exacerbate these pressures as well as those on prices.”
Mark Scholz, president of the Canadian Association of Oilwell Drilling Contractors, said that work has “completely evaporated” for his members, which include drillers, frackers, and other service contractors.
Scholz said that so many producers are cutting capital expenditures that by one analysis 65 per cent of the expected economic activity for the sector in 2020 has already occurred in the first quarter.
There were 64 active rigs in Canada by the third week of March, compared to 239 a month ago, a 73-per-cent drop, COADC data shows.
“Most of the producers in Canada are underwater, and are not able to justify future investment let alone current investment,” he said.
Oil prices, which have plunged more than 65 per cent in the first quarter, have decimated the industry, he said.
That’s why his organization is calling for a federal aid package that includes targeted assistance specifically for service contractors, in addition to oil producers.
“The traditional trickle down economics will not work in this case,” said Scholz. “The argument is that if you provide assistance in liquidity to the producers, they would in turn deploy it into the marketplace … that is fundamentally incorrect.”