$59B worth of Canadian projects under threat
It is quite rare to see [construction] contracts cancelled
Canadian oil and gas projects worth a total of $59 billion may be deferred during the next three years as the “collapse” in capital investment in the global oil industry echoes the dark days of 2009 and 1999.
West Texas Intermediate benchmark has lost nearly half its value to reach US$53 per barrel within six months, while global benchmark Brent crude has slid below US$58 from its 2014 high of US$115.
As many as 16 oilsands project phases that have not yet received corporate sanctioning may be deferred if current oil prices persist, according to Mark Oberstoetter, Calgary-based lead analyst of upstream research at Wood Mackenzie.
The energy consultancy expects $12 billion worth of projects in the Canadian oil and gas sector to be deferred this year, $20 billion in 2016 and $27 billion in 2017, if oil prices remain at their current levels.
That could curtail the 650,000 barrels per day of additional oil many expected to come on stream in the next three years.
Key projects expected to come on line by 2017 include: the $13.5-billion, 165,000bpd Fort Hills venture owned by Suncor Energy Inc., Total E&P Canada Ltd. and Teck Resources Ltd.; Canadian Oil Sands Ltd.’s $3.9-billion 100,000-bpd Mildred Lake replacement project that had been expected to start in 2014; Imperial Oil Ltd.’s 110,000-bpd Kearl Phase 2; ConocoPhillips Canada Ltd.’s 109,000-bpd Surmont Phase 2; and Royal Dutch Shell Plc.’s 100,000-bpd Jackpine expansion.
Projects expected to face delays include: Cenovus Energy Inc.’s Christina Lake Phase H and its Narrows Lake Phase A; expansion work at Husky Energy Inc.’s Sunrise SAGD plant; and PetroChina’s MacKay River project.
“We are now doing project updates for the likes of [Cenovus’] Narrows Lake and MEG’s Christina Lake which will see some of the growth volumes delayed,” Mr. Oberstoetter said.
Oilsands projects require significant upfront capital investments that can dissuade investors at the best of times. Even before the oil price crisis took hold, Suncor, Total and Statoil ASA had cancelled or deferred major high-cost projects in 2014, including Total’s $11 billion Joslyn mine.
In December, Husky said it will delay a decision on its $2.8 billion White Rose project offshore Atlantic Canada. Chevron Corp. also put on ice plans to drill in the Canadian Arctic, citing “economic uncertainty in the industry.” LNG proponents in British Columbia have also deferred decisions on their projects.
Company reaction to the plunge in prices echoes the dark days of 2009 at the height of the global financial crisis, and 1999 when oil prices fell below US$10 per barrel.
“If Brent oil prices were to average US$80 per barrel in 2015, global [exploration and production] spending would fall by 20% to US$640 billion in 2015,” Bob Brackett, senior analyst at New York-based Sanford C. Bernstein & Co., said in a bearish note to clients. “Such a fall would exceed the reduction observed in 2009 and be on par with the 1999 collapse.”
North American capex may fall as much as 23% in 2015 at US$80 per barrel, according to Mr. Brackett; at US$65 per barrel, the continent may see a capex cut of 35% — a larger drop than in other jurisdictions.
Canadian capex in the oil and gas sector fell 20% in 2009, and another 2% in 2010, as Canadian producers reeled from lower demand and rock-bottom prices. Most analysts expect a 10%-15% drop in capex for Canadian producers in 2015, although bigger cuts may come as the year unfolds.
“To date, the compression in E&Ps budgets has been in the ballpark of what we witnessed in 2008/09, down 15% vs. 20% for the previous cycle,” said Maxim Sytchev, managing director, head of research at Dundee Capital Markets in Toronto.
A majority of Canadian companies have already begun cutting planned capital expenditures for 2015, as low oil prices put pressure on balance sheets and leave little room for expansion plans.
Calgary-based investment bank Peters & Co. expects Canadian producers to generate a total of US$53 billion of cash flow in 2015 — the lowest level since 2009.
The total funding gap (cash flow minus capital spending and dividends) is forecast to reach $23 billion in 2015, compared to an average of $16 billion over the past three years, the bank said in a Dec. 10 report.
“As a result we expect producers in Canada and the U.S. to become increasingly conservative towards their capital spending plans, although the most significant reductions are likely to be implemented following Q1 / 2015 given near-term spending commitments.”
Indeed, if current oil prices persist or fall further, companies may take a harder look at their projects.
“It is going to be challenging to contemplate any greenfield oilsands expansion, given the pricing environment,” Mr. Sytchev said.
“But we don’t want to have this panicky reaction on the part of investors who are thinking the capex is falling off the cliff. Even if it is down 15%, it still means that the other 85% is being spent,” Mr. Sytchev says.
One factor that should help soften the impact of potential project delays or cancellations in the near term is the healthy level of backlog for Canadian engineering and construction companies, with average third-quarter backlogs up 21% year-on-year.
Analysts are also relying on the much-touted resilience of a high-cost industry that has weathered such crises before.
“It is quite rare to see the construction companies have sizable contracts cancelled,” Mr. Sytchev notes. “Even during the financial crisis, there were very few de-bookings in Canada. It’s much more prevalent in the U.S.”
Lower commodity prices may also be an opportunity for LNG companies to seek more concessions from Victoria and Ottawa, and help get to that elusive final investment decision.
Malaysia’s Petronas Bhd. and BG Group of the U.K. deferred their decisions on separate West Coast LNG projects, while Apache Corp., one of the original developers of the Kitimat, B.C. LNG project, has exited the development.
“LNG has its own momentum,” Mr. Sytchev says. “If you look at the pricing discrepancy, between LNG pricing in Asia and AECO, the spread is still fairly significant. Speaking with some of the service providers, it looks like there are still lots of inquiries.”
B.C. Premier Christy Clark told the Financial
Post in December that her government was negotiating separate agreements with LNG proponents that recognize each project’s unique features.
Canadian oil companies are not the only ones feeling the heat of low crude prices. Globally, companies have already cut spending by more than US$9 billion in recent weeks alone, and Wood Mackenzie forecasts spending would need to be cut by US$170 billion, or 37% yearon-year, if oil prices stay at US$60.
“US$127 billion of global industry greenfield investment in 2015 [is] at risk of deferral,” Wood Mackenzie said. By 2017, that figure could rise to just over a trillion dollars, according to Fraser McKay, principal analyst for Wood Mackenzie.