Alberta's heavy crude dropped to its lowest price in five years, threatening to squeeze profits and deepen spending cuts in the oil sands as producers scale back growth plans.
U.S. and international oil prices have been sinking since June due to global oversupply. On Wednesday, U.S. benchmark West Texas intermediate oil plunged another 4.5 per cent to close at $60.94 (U.S.) a barrel. Brent, the global standard, fell 3.9 per cent to close at $64.24; it fetched $115 in June.
The global oil collapse has also dragged down the value of Western Canada Select (WCS), the main oil sands benchmark, to even lower levels.
The heavy crude for January delivery on Wednesday fetched about $43 (U.S.), about $18 below WTI. Discounts relative to U.S. crude on that scale in recent years have sapped billions from corporate coffers in the Canadian energy industry and prompted dire warnings about Alberta's government finances.
The skidding price for Alberta's extra-thick crude is well off expectations set by even the largest oil sands companies, raising the spectre of further cuts and project delays as oil's decline begins to take a toll on longer-term growth plans in northern Alberta.
"Definitely there's caution, especially for those that have to pay dividends and fund their capex programs," said Jackie Forrest, vice-president at ARC Financial Corp. in Calgary.
The cuts are likely to bypass projects already under construction, but companies will be reluctant to sanction new developments at today's prices, she said. That will ultimately crimp production growth. "We'll see less spending and less new supply if [project] sanctions are delayed this coming year," she said.
Oil prices have spiralled downward since members of the Organization of the Petroleum Exporting Countries agreed last month to maintain their production ceiling at 30 million barrels a day.
For years, oil sands companies have grappled with steep discounts as the province's fast-growing production backed up due to constrained export pipelines. The sharp drop in WCS prices this week comes even as the energy industry boosts shipments of oil by rail and benefits from the startups of major new pipelines such as Enbridge Inc.'s 600,000 barrel-a-day Flanagan South conduit to the U.S. Gulf Coast.
Oil sands producers have been somewhat sheltered from the worst of oil's decline by a weak Canadian currency and narrower heavy oil differentials. But those buffers now appear to be wearing thin as low prices force companies to revise spending plans.
Several firms have rolled out tighter budgets and slashed dividends amid expectations of a prolonged slump.
Baytex Energy Corp., which operates oil sands assets in northwest Alberta, this week lopped 30 per cent from its 2015 budget and cut its monthly dividend by more than half to 10 cents a share. The Calgary-based company now expects to spend between $575-million (Canadian) to $650-million next year, with 75 per cent of the total earmarked for shale oil assets in Texas.
Oil sands player MEG Energy Corp. recently lowered its 2014 budget by a third and said it would defer spending on long-term growth projects. It set its 2015 budget at $1.2-billion.
Canadian Oil Sands Ltd., the biggest shareholder in the Syncrude Canada Ltd. consortium, last week reduced its quarterly dividend by 42 per cent and said it would spend $564-million. That's down from $1.1-billion of expected capital expenses this year.
The WCS benchmark now fetches 28 per cent less than the $60 (U.S.) forecast by Suncor Energy Inc. in its 2015 budget, challenging the profitability of all but the lowest-cost steam-driven oil sands projects, according to calculations by Patricia Mohr at the Bank of Nova Scotia.
"There will be a slowdown in capital spending, but I think some of the major companies who are well funded and have strong balance sheets, they will continue to go ahead with developments that were under way," she said in an interview.