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The Suncor processing plant near Athabasca River is shown at their mining operations near Fort McMurray, Alta., in this Sept. 17, 2014 file photo.Todd Korol/Reuters

Oil companies will slash $23-billion from their capital spending in western Canada this year, but production is expected to grow over the next few years as a result of the recent investment boom, the Canadian Association of Petroleum Producers said Wednesday.

In an update to its short-term forecast, the industry group said that its members will cut their capital budgets by a third, to $46-billion this year. Oil sands investment is expected to fall by about a quarter, to $25-billion in 2015 from $33-billion last year.

Despite a global market bursting with crude inventories, CAPP said Canadian companies will continue to boost production over the next two years, although at a slower rate than was previously forecast. It expects western Canadian production will climb 150,000 barrels a day this year, and by that much again in 2016, although it has reduced its growth forecast by 65,000 b/d this year and by 200,000 b/d for 2016.

"The reasons we're seeing an increase each year is that we've had seen such good investment in the last four or five years," CAPP president Tim McMillan said in an interview. "And much of the oil sands that is coming on stream are projects that were invested in over the last four or five years."

Crude prices rebounded Wednesday from steep losses earlier in the week, with West Texas Intermediate gaining $1.31 (U.S.) a barrel to $47.78. But analysts warn prices could fall, as the world continues to produce more oil than is being consumed. Economists are forecasting prices won't begin to recover consistently until the second half of the year.

First Energy Capital economist Martin King said it is far from certain that crude prices have bottomed out since global supply continues to exceed demand, and will do so throughout 2015.

While companies have been cutting budgets and drilling operations, production in the U.S. is expected to grow by 859,000 b/d this year – down from the staggering 1.4-million b/d gain in 2014 – but still more than the market needs.

Despite lower prices and cuts to capital spending, First Energy forecasts that oil sands production will grow to 3.2 million b/d in 2018, from 2.3 million last year. In its 2014 forecast, CAPP said oil sands production will reach 4.1 million b/d by 2025.

"Once you get beyond two years, we factored in some slowdown in that [oil sands growth]," Mr. King said in an interview. "But a lot of these projects are front-end loaded with long lead times and are stress tested at lower oil prices, so it still seems reasonable to assume some production growth."

Project cancellations and delays will have a greater impact on production closer to 2020, he said.

But oil sands development increasingly will be a game only for the largest oil companies, including state-owned firms that take longer-term views, said Ed Morse, head of commodities research at Citi Group Global Markets Inc.

"These are projects that range between being expensive and very expensive, both in terms of capital costs that need to be incurred or break-even costs in terms of oil prices to get them going, and in terms of operating costs," Mr. Morse said.

Oil companies are cutting spending in Western Canada, North America and indeed the world. France's Total SA said Tuesday it would cut as much as $3-billion from its 2015 budget compared with a year ago, with spending reductions in Canada's oil sands, the U.S. shale oil, and the Britain's North Sea. Oil sands giants, including Suncor Energy Inc. and Canadian Natural Resources Ltd., have announced spending cuts and layoffs.

Mr. McMillan said the downturn has increased the urgency of new pipelines so that producers have access to the best markets at the lowest costs. "No question, the effects on the industry are sharp but we continue to need all forms of transportation in all directions – pipelines in particular – as our industry continues to grow in the years ahead," he said.

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