The price of West Texas Intermediate crude fell as low as $79.78 US a barrel this week and the talk from Bay Street to Stephen Avenue has been about when — “it” seems to be off the table — the dramatic slide will derail the oil boom that’s become critical to Canada’s economy.
“Everybody is talking about it,” said Mike Kenyon, general manager in Canada for Calgary-based Packers Plus Energy Services, on Friday morning. “They’re talking, ‘What is the number where activity levels are going to fall off?’ Some people are saying they’re good to $60-$65 a barrel and others are saying activity levels are going to drop substantially if we go below $80.
“We’re hearing a lot of people’s opinions right now.”
After falling to its lowest level since June 2012 on Thursday, WTI rebounded to finish the week at $82.75. BMO Capital Markets chief economist Doug Porter said Friday even with the sell-off on the Toronto Stock Exchange “the single most important development for the Canadian economy is the deep drop in oil prices since the summer.”
The boom-and-bust cycles in the oil and gas industry are typically more pronounced in the service sector than with producers that hire drilling, water hauling and pressure-pumping companies that have historically ramped up, and down, staffing levels in line with activity.
Where prices go from here will be critical for oil and gas producers and service companies but research from a number of financial institutions this week indicated the impact in Western Canada could be less dramatic than the dire headlines would suggest.
Activity levels are almost universally forecast to decline in 2015 but nowhere near the precipitous fall off when oil and natural gas prices plunged five years ago. The number of wells drilled fell from 20,576 in 2008 to 8,261 the following year.
TD Economics forecasts the number of wells drilled will be down slightly from this year to 11,100 in 2015, although FirstEnergy Capital estimates there will be 10,200 new wells.
With companies like Packers Plus doing ever more hydraulic fractures on increasingly long horizontal wells, TD said the number of drilling days will increase slightly to 131,000 days in 2015. FirstEnergy is more pessimistic but predicted almost 114,000 drilling days in its revised forecast released Friday.
TD said more than 75 per cent of the wells will target oil reservoirs.
The growth in shale oil exploration in the U.S. — oil production is expected to reach a 45-year high next year — will be challenged with lower prices in an industry dependent on cash flow. However, Scotiabank said heavy oil — including western Canadian Select — has held up better than light grades such as WTI or globally traded Brent and the much-maligned oilsands crude blend is now “Canada’s strong card.”
“Narrower price discounts for WCS heavy will shield Canadian producers from some of the drop,” wrote Patricia Mohr, vice-president and commodity market specialist for Scotiabank. “The price of ‘heavy oil’ has outperformed.”
Brent crude has had the most dramatic slide — since hitting $115 US a barrel in mid-June it has fallen to $86.16 on Friday — but little Canadian oil trades off Brent prices. WTI peaked at $107 a barrel before its decline; however, the WTI-WCS discount — which has been as much as $40 during the last two years — had fallen to close to $13 this week.
“Commodity volatility is not new to the Canadian E & P sector, where wild swings in differentials on both light and heavy oil in the past three years have forced costs discipline and companies to maintain clean balance sheets,” Dundee Capital Markets said in a report. “Tight differentials and a weak Canadian dollar are mitigating the impact of the drop in WTI.”
TD forecasts that oil and gas production in Western Canada will climb to 6.1 million barrels a day of oil equivalent in 2015 with revenues industry-wide of almost $131.2 billion compared to $142.9 billion this year.
Canada’s oil exports reached an all-time high this month at more than three million barrels a day.
Scotiabank’s Mohr said a production cut from OPEC members of around one million barrels a day is needed to steady prices, otherwise WTI is likely to average $85 in 2015.
Packers Plus’s Kenyon noted even the price declines can be misleading.
“When prices are good it’s easy to make money. You don’t have to be perfect at drilling or fracking wells to make money,” he said.
“When things get tight, people look at ‘How can we do these cheaper? How can we this better?’ In the last downturn we actually saw our business get busier because people came to us looking for that kind of expertise. It actually worked in our favour.
“It will affect us overall but it won’t be as detrimental as you sometimes might think.”