Nigeria's Minister of State for Petroleum Resources and President of the OPEC Conference Emmanuel Ibe Kachikwu attends a news conference after a meeting of the Organization of the Petroleum Exporting Countries, OPEC, at OPEC headquarters in Vienna, Austria on December 4, 2015.JOE KLAMAR/AFP / Getty Images
OPEC's refusal to rein in production spells extended pain for Canada's oil patch, setting the stage for deeper cutbacks as a worldwide glut of crude keeps pressure on U.S. and global prices.
West Texas intermediate oil sank below $40 (U.S.) a barrel on Friday after the Organization of the Petroleum Exporting Countries failed to agree on production limits, effectively maintaining a Saudi Arabia-led policy of pumping record volumes to defend market share.
OPEC secretary-general Abdullah al-Badri said in Vienna the cartel postponed any decision on setting new quotas to its next meeting in June, when it hopes to have a better idea of how much crude Iran is capable of adding to the market once Western sanctions are eased.
It points to continued oversupply of crude that has rocked Western Canada's energy industry. Oil producers have already mothballed billions of dollars worth of expansions, shut drilling rigs and chopped dividends to cope. Layoffs number in the tens of thousands.
The S&P TSX energy index, which includes the shares of integrated oil companies, independent explorers and oil-field service providers, sank more than 2 per cent following OPEC's inability to reach a new deal on output.
More cuts are expected in coming months as companies struggle to keep expenses in line with dwindling returns and a price war between OPEC members intensifies, said Jackie Forrest, vice-president at ARC Financial Corp.
"If you assume that Iran's production comes on, it could actually just create more incentive for some of the other producers to keep their market share, so I think that could extend the glut into next year," Ms. Forrest said.
OPEC is pumping an estimated 31.4 million barrels per day, well above its previous daily quota of 30 million barrels. The cartel said it expected non-OPEC supplies to contract next year, with global demand forecast to rise by 1.3 million barrels per day.
OPEC delegates signalled that they would consider lowering members' production ceilings only if large producers outside the cartel, such as Russia and Mexico, co-ordinated with their own cuts. That is unlikely.
Mexico has already told the group it will not consider lowering production, after years of output declines due to a lack of foreign investment and technology, said Victor Manuel Aviles, spokesman for Mexican energy minister Pedro Joaquin Coldwell. Mr. Coldwell was in Calgary as part of a delegation partly assembled to explain the upcoming bid process for Mexican oil fields under the country's liberalized energy-investment policy to Canadian companies.
Mr. Aviles said Mexican officials met with OPEC about a month ago, and their message was that the country had no intention of lowering output.
"No cuts at all – it's not possible for us," he said.
In the Canadian oil sands, lower costs for labour and materials have enabled some companies to press ahead with expansions. However, Suncor Energy Inc., Canadian Natural Resources Ltd. and others may adjust the pace of spending on mega-projects under development as weak prices erode their ability to cover costs, Ms. Forrest said.
"They may slow down the pace of spending to some extent, if there are cash-flow or external capital issues, but I think you will see construction continue on those projects," she said.
The Bank of Canada has estimated that overall capital spending in the industry will fall by 20 per cent in 2016 following a 40-per-cent drop this year.
The most vulnerable companies as low oil prices persist amid OPEC's inaction are those struggling to cut high debt levels, said Samir Kayande, analyst at ITG Investment Research.
"For those guys that are on the edge, it just makes life all that much more difficult, the longer this lasts," Mr. Kayande said.
Analysts at Barclays PLC said the lack of guidance on a production quota underlines the discord among OPEC members. The producing group's communiqués have historically included pledges to adhere to, or else maintain, production in line with a set target.
"This one glaringly did not," analysts led by Miswin Mahesh wrote in a note to clients. "For OPEC, managing the impossible trinity of achieving higher market share, higher prices and higher demand through a nominal target which members continue to breach continues to be difficult."
Jeffrey Jones