International oil companies saw their profits slump in 2013, and one prominent economist expects the pain to deepen as crude prices head lower in the face of growing North American production and weak demand growth.
The world's biggest oil companies are already feeling a pinch from higher costs, softer prices and declining production, as both Exxon Mobil Corp. and Royal Dutch Shell PLC on Thursday posted lower fourth quarter earnings compared to a year ago.
During a visit to Ottawa, Citigroup economist Edward Morse said he expects 2014 to be a "tipping point," with prices falling by at least 10 per cent and perhaps by as much as 20 per cent. As a result, companies are going to have be more disciplined in their capital spending, and high-cost resource sectors – such as Alberta's oil sands – will be hit hardest.
"The more expensive oil sands projects will see a delaying process on capital expenditures, and a re-evaluation of investment decisions," Mr. Morse said in an interview.
He said companies will need to be far more disciplined in their capital spending, and resource-rich countries – or provinces – will have to compete more aggressively for investment.
Exxon Mobil Corp. reported its fourth-quarter earnings were down 16 per cent from the corresponding period in 2013, to $8.35-billion (U.S.) as production of oil and gas dropped by 1.8 per cent. Exxon has seen its production fall in seven of the last eight quarters, but is promising to reverse that with new investments in Argentina, Iraq, Russia, the United States and Canada.
Royal Dutch Shell PLC saw its fourth-quarter earnings tumble 48 per cent below year-earlier levels to $2.9-billion. The Anglo-Dutch giant slashed its capital budget by 20 per cent, announced major asset sales and suspended its drilling program in the U.S. Arctic offshore.
Analysts see a growing supply of crude that is more than ample to meet existing demand. While the U.S. economy continues to pick up steam, former hot spots such as China, India and other emerging markets have slowed from the torrid growth rates of just a few years ago. The U.S. alone is forecast to add one million barrels per day of crude production in each of the next several years.
Mr. Morse said he expects the shale oil and gas revolution will spread across the world in the coming years, even as the United States continues to increase productions. "I don't think it is going to come to and end any time soon," he said. "And I think it is going to spread across the planet more quickly than conventional wisdom suggests – shale is the basic host rock for hydrocarbons and it is everywhere, it's ubiquitous."
He pointed to large shale resources that contain some combination of dry gas, natural gas liquids and crude in Argentina, Australia, Canada, China, Mexico, Saudi Arabia and Russia.
As a result, he expects crude prices to be significantly lower than the International Energy Agency forecasts that predict steadily rising prices as international oil companies struggle to maintain enough production growth to keep up with rising demand in Asia and other emerging markets.
Meanwhile, Canada is lagging many of its competitors with the slow pace of development of liquefied natural gas (LNG) export terminals on British Columbia's West Coast.
"Time is running out for Canada in terms of LNG," he said. The U.S. is poised to become a dominant global gas supplier, thanks to a seemingly endless supply of shale gas, with exports expected to grow from zero to more than eight billion cubic feet a day by 2020, and there are other countries eager to serve markets in South Korea, Japan and China.
"You can't build LNG facilities without customers, and there is frenetic competition for customers in projects unfolding in Australia, the United States and east Africa. It's my judgment that the LNG market is in danger of moving into a glut."