Oil's deep slide is poised to take the air out of Western Canada's shale oil boom and could crimp spending on future oil sands growth as the rout in U.S. and world crude prices shows few signs of letting up.
North American crude for December delivery on Tuesday sank to $77.19 (U.S.) a barrel in New York after top producer Saudi Arabia cut export prices to the United States. The U.S. benchmark is off 20 per cent so far this year amid ample supplies, weak demand and speculation that the Organization of the Petroleum Exporting Countries won't cut production to prop up prices. Brent, the global benchmark, fell to a four-year low of $82.82; it topped $115 a barrel in June.
The rout is deepening just as producers in Alberta's oil patch hash out next year's budgets, raising the spectre of a pullback in a sector already grappling with infrastructure constraints and high costs.
Oil's nosedive could force smaller companies with high debt to scale back drilling in expensive shale plays, said Chris Cox, analyst at Raymond James Ltd. in Calgary. Companies may also cut capital budgets to preserve quarterly payouts, he said.
"If there's blood hitting the streets, I think it's going to be on those dividend and tight oil players," Mr. Cox said.
Those companies must constantly drill to maintain production levels, and a sustained drop in oil prices below $80 is likely to prompt cutbacks. "They need to either revisit their development plans going forward and their growth strategy, or revisit their dividend."
So far, much larger oil sands players haven't flinched.
Cenovus Energy Inc. expects to keep 2015 spending in line with this year's budget of roughly $3-billion (Canadian), with about $2-billion committed to expansions under way at its flagship Foster Creek and Christina Lake projects, chief executive officer Brian Ferguson said last week. He said the company would maintain "flexibility" on future spending "in light of the current weakness in commodity prices."
Suncor Energy Inc., Canada's largest oil and gas company, plans to spend between $7-billion and $8-billion next year, as the company accelerates development of its multibillion-dollar Fort Hills mine, chief executive officer Steve Williams said last week. That's up from a projected $6.8-billion budget this year.
Still, oil sands companies may pare expenditures on expansion-related work such as delineation drilling on new lands, Mr. Cox said. Any pullback in the resource is "going to be more nuanced than just broad cuts across the board," he said. "What you won't see is projects that are already in development being cut."
Some companies began scaling back growth plans long before oil prices began their steep descent. Norway's Statoil ASA and Total SA of France this year cancelled billions in new development, citing rising costs and delays building multibillion-dollar export pipelines designed to boost the value of Canadian oil.
Falling prices are more likely to crimp cash flow for smaller companies beyond the oil sands, said Eric Nuttall, portfolio manager at Sprott Asset Management in Toronto. Other companies with strong financial hedges will fare better, he said.
"I think you're going to have some very conservative initial budgets where they'll reserve the right to increase them once there's greater certainty on product pricing," he said.
"I think it's just going to be a broad-based slowdown in spending."