Growing signs of a thaw for Canada’s oilpatch in 2017
Slowly, surely, there are signs of a thaw — in Canada’s ice-cold oilpatch.
On Monday, Baytex Energy Corp. announced it will boost its 2017 capital budget to about $325 million, up $100 million from this year’s levels.
It follows several other producers, including Cenovus Energy Inc. and Crescent Point Energy Corp., strengthening their spending plans next year.
While 70 per cent of Baytex’s budget will target its Eagle Ford properties in Texas, most of the additional capital will be directed toward Canadian heavy oil assets at Peace River and Lloydminster.
“We’re pretty excited to get back to work in Canada,” said Baytex senior vice-president Brian Ector. “We haven’t invested a lot in our heavy oil assets for the last 18 months.
“We’re over two years into this downturn and starting to see signs this price recovery … just might be sustained at or above $50.”
As the year winds down and the chilly winter drilling season picks up, more signs are emerging that the oil price funk is fading and the grim recession might be on its way out in 2017.
At a weekend meeting, non-OPEC countries such as Russia and Mexico agreed to lower their production by 558,000 barrels per day next year, following the cartel’s decision last month to chop 1.2 million bpd.
In a surprise twist, Saudi Energy Minister Khalid al-Falih said the oil-rich kingdom was eyeing even further reductions in the new year.
Fuelled by the news, benchmark West Texas Intermediate oil surged above US$53 a barrel Monday on the New York Mercantile Exchange before closing at $52.83, up $1.33.
At the Canada legislature, the happiest person under the dome was Finance Minister Joe Ceci, whose government forecasts oil prices will average $45 a barrel for the fiscal year.
Every $1-a-barrel increase over the course of the year is worth $130 million for the treasury, so an extra $7 a barrel goes a long way in a province expecting a record deficit.
“It certainly helps our budget out, but we’ve got a long ways to go,” Ceci told reporters. “I feel better about where oil is at this week than I did a month ago, for sure.”
And why not? Oil prices on Nov. 14 closed at just $43.32 a barrel.
But it’s an open question how much benefit will eventually flow to Canadian petroleum producers from OPEC’s tough talk of turning down the oil taps.
To start, OPEC countries have a long track record of making deals they don’t keep, and all eyes will be on their actual production numbers in January.
“A not-so-fun fact is that since 1982, OPEC deals have been cheated on 96 per cent of the time,” says Judith Dwarkin, chief economist with RS Energy Group in Calgary.
“One of the biggest unknowns is how long the cuts will be adhered to. The track record is not great.”
Skip York, vice-president of integrated energy with consultancy Wood Mackenzie, assumes OPEC and non-OPEC players will actually live up to about two-thirds of the promised reductions until the end of May, when the agreement expires.
“That pretty much gets the market rebalanced by the end of 2017,” he says.
With the expected production cut, Wood Mackenzie has bumped up its forecast for oil prices next year to $56.50 a barrel, although York cautions that other rallies in the spring of 2015 and 2016 soon fizzled out.
Other factors could dampen the recovery.
There’s a risk that the price surge will stimulate more production from U.S shale producers and put a lid on the party.
A research note from Goldman Sachs Group said that with recent increases to the U.S. rig count — the number of rigs drilling jumped by 21 to 498 last week — shale production south of the border is already on track to grow from the first quarter of 2017 onward.
It estimates U.S. producers can add 800,000 bpd annually with crude at $55 a barrel with limited outspending of cash flow.
For Canadian companies, these higher prices will lift revenues and cash flow levels, and likely lead to increased work on promising gas and oil plays next year.
But for oilsands projects, these long-term developments take years to plan and require decisions based on oil prices looking out decades, not months.
“I’d say it’s a very positive sign on the long-term trajectory for future investment, but it’s going to remain muted for some period of time,” says Kevin Birn, director of Canadian oilsands for IHS Energy.
At Baytex, the company is going to enjoy the recent price swing and drill 73 wells in Canada next year. It’s not adding staff, although more exploration will create work in the oilfield services sector.
“We’re not going to get ahead of ourselves,” says Ector.
“We’d like to believe there are better times ahead for our industry in 2017 and sitting here today, we’re seeing signs of that. But there are a lot of moving parts.”
We’ll soon see how this all unfolds for Canada’s energy sector in 2017.
But after being down for the past two years, let’s hope there is nowhere to go but up.
Chris Varcoe is a Calgary Herald columnist.
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