From the headlines of the past few days, you could be excused for thinking the Canadian oil and gas industry is on a belt-tightening binge. But the oil patch, like many a wayward country on the euro zone periphery, is not naturally inclined to austerity. Some large and notable exceptions aside, it will take more than a year or two of disappointing commodity prices to quell the industry's thirst for growth.
Yes, Cenovus Energy Inc. on Thursday slashed its 2014 capital budget by 13 per cent compared with its 2013 budget. That came on top of news earlier in the week that Husky Energy Inc. and Canadian Oil Sands Ltd. had also reduced their capital budgets for next year. All three are big players in the Alberta oil sands, where nagging transportation bottlenecks have depressed prices well below West Texas Intermediate, the main North American oil benchmark – and uncertainties about the future of pipeline developments raise serious questions about how soon those costly problems can be resolved.
Yet economist Peter Tertzakian of Calgary-based energy private-equity manager ARC Financial Corp., who closely tracks capital spending trends and plans in the oil and gas sectors, says these moves don't indicate a broader cost-cutting trend throughout the industry. His most recent data indicate that capital spending for the sector as a whole is forecast to grow nearly 3 per cent next year, to $67.35-billion. Even in the oil sands, Mr. Tertzakian forecasts capital budgets will increase nearly 2 per cent next year.
While some big names are cutting their spending, others have been aggressively ramping it up. Two oil sands heavyweights, Canadian Natural Resources Ltd. and Suncor Energy Inc., recently unveiled capital budgets pushing $8-billion each for 2014 – a jump of 16 per cent from their 2013 budgets. Clearly, where some companies see a need for caution, others see an opportunity to jump into the breach – to take advantage of a lull in activity among their competitors to push ahead with projects when the competition for labour, materials and equipment is a little less heated (and, by extension, less costly).
As Mr. Tertzakian readily acknowledges, "There is a bit of a disconnect" between the modest uptrend in spending and the weak price environment – not just for oil sands bitumen, but in natural gas, where prices have been depressed for much of the past two years. However, he said companies appear to be addressing their pricing problems by spending more – specifically on infrastructure that will improve transportation flows and reduce inefficiencies. It's a trend that's likely to continue over the next couple of years.
Meanwhile, the 2014 spending outlook represents something of a reversal from 2013, in which the sector's capital spending, by Mr. Tertzakian's estimates, has dipped 2 per cent from 2012. That estimate is more or less consistent with Statistics Canada's survey of 2013 capital investment intentions taken earlier in the year, which indicated that spending in the mining and oil and gas extraction business was set to decline by 2.7 per cent this year – representing the biggest drag on Canadian business investment of any sector in the country. The anticipated reversal is good news for the Canadian economy, and may contribute some welcome upside to gross domestic product (GDP) growth expectations for next year.