An oil pumpjack sits unused in a field north of Edmonton, February 8, 2013.
Alberta oil producers are poised to pump more crude into a North American market already brimming with U.S. shale supplies and booming oil sands output, deepening a glut that has sent prices into a tailspin and hammered energy shares across the board.
The rapid slide in benchmark oil prices – U.S. crude this week crashed below $50 (U.S.) a barrel, down from more than $100 in June – has prompted deep cuts to capital spending and forced several companies to slash payouts to investors.
But many are pledging to boost output anyway, even as lower prices erode profits and threaten corporate cash flows.
Crescent Point Energy Corp. on Tuesday became the latest player to cut its 2015 budget while promising increased production. It axed planned spending 28 per cent from last year, to $1.45-billion (Canadian), while at the same time signalling it expects overall output of oil, gas and liquids to jump by 9 per cent.
Such moves by Alberta companies will dump more crude onto a continent grappling with severe oversupply, as producers opt to reduce investments in new projects rather than pull back the flow of oil today.
Another 300,000 barrels a day (b/d) is poised to come from the oil sands alone this year, according to ARC Financial Corp.
"No one wants to disappoint their shareholders and say we're cutting production. That's death," said Judith Dwarkin, director of research at ITG Investment Research in Calgary. "So it's a bit of doing what they can to stay afloat during a difficult period and hoping somebody else shuts in."
Crescent Point joins a slew of energy companies predicting higher production despite spending cuts. Cenovus Energy Inc., which pared its 2015 budget by 15 per cent and said it may cut further, said it plans to increase oil sands production by about 9 per cent this year, for example.
Similarly, neither Husky Energy Inc. nor smaller independent MEG Energy Corp. forecast cuts to production, despite MEG lowering its planned expenditures this year by 75 per cent and Husky chopping its budget by a third.
Analysts say the mismatch reflects several factors: financial hedges that guarantee higher prices; shale drillers such as Crescent Point shifting capital to more economic zones; and the pending start-up of several big-ticket oil sands projects that began construction long before prices began their precipitous slide.
Those developments "can't just turn on a dime," Ms. Dwarkin said. "They're not going to stop, even though prices are low."
U.S. crude prices have more than halved since June amid a global supply glut and weak demand, a situation compounded by OPEC's refusal to cut output late last year.
On Tuesday, benchmark West Texas Intermediate skidded again, dropping 4.2 per cent to $47.93 (U.S.) a barrel. Western Canada Select oil sands crude fetched about $14.50 less than that, Calgary broker Net Energy Inc. said, or roughly $33.43 a barrel – roughly half expectations of some of the sector's largest companies.
In recent years, Husky, France's Total SA, Imperial Oil Ltd. and Cenovus have plowed billions into expansion projects that are now approaching completion, adding to supply pressure.
"We're not seeing any expectations that people will stop those projects," said James McLean, a partner in the Calgary office of PricewaterhouseCoopers LLP. "Once you're in and committed, the investment is so close to being realized that it's worth pursuing it."
The fresh wave of crude could exacerbate a glut driven by U.S. shale production. Soaring output from the North Dakota Bakken and elsewhere drove a 1.2-million-b/d increase in U.S. oil production last year, up 16 per cent from a year earlier, to 8.6 million b/d. That's the highest level in 30 years, according to U.S. government data.
Unlike previous tranches of oil sands supply, however, the new production will benefit from smoother pipeline access to the refining hub on the U.S. Gulf Coast (USGC), potentially opening a new front in a battle for market share led by Saudi Arabia.
"Combined with the wave of Canadian crude about to reach the USGC, we believe this is extremely bearish for markets," Citibank analysts said in a report this week.
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The oil patch weathers the storm
Tighter budgets, higher output: Many Alberta oil companies are still planning to increase oil production in 2015 even as they trim spending budgets.
Baytex Energy Corp.
The company expects to increase production by 4 per cent while spending between $575-million and $650-million.
It previously planned to spend roughly 30 per cent more than its current budget.
Bonavista Energy Corp.
It expects to increase production by 7 per cent while spending between $375-million and $425-million.
It previously planned to increase production by 9 per cent in exchange for spending between $525-million and $575-million in 2015. Average oil price assumption for 2015: $62 (U.S.) a barrel.
Whitecap Resources Inc.
The company expects to increase production by 5 per cent a share while spending $245-million (Canadian) in 2015.
It previously planned to increase production by 12 per cent a share in exchange for spending $360-million in 2015. Average oil price assumption for 2015: $65 (U.S.) a barrel.
Encana Corp.
Encana expects to increase oil and natural gas liquids production by 70 per cent while spending $2.7-billion (U.S.) to $2.9-billion in 2015.
Total production will be between 405,000 and 440,000 barrels of oil equivalent a day. Encana calculates its final spending tally for 2014 will hover between $2.5-billion and $2.6-billion.
Average oil price assumption for 2015: $70 a barrel.
Carrie Tait