Oilpatch Maintains a Tight Grip On Expenses During Record Output

The arrival of the new omicron COVID-19 variant may explain why Canadian oil and gas companies have been afraid to loosen their purse strings in spite of this fall’s commodity price rise.

West Texas Intermediate crude closed at $65.67 US on Wednesday, down more than 20% from early November before the omicron arrived. Fears that omicron would affect the pandemic’s economic recovery prompted a broad-based sell-off on the markets last Friday, with energy stocks taking the biggest hit.

Just how much uncertainty there is still in the Canadian oilpatch and why companies are being cautious, despite recent profits, was brought home by this fall’s record-breaking oil prices.

A record-breaking 119 million barrels of Alberta oil were produced in October, according to Statistics Canada.

However, according to Statistics Canada, oil and gas financing costs in the first three quarters of 2021 were $8.5 billion, still 32% lower than the same period in 2019 prior to the pandemic.

While spending was down by more than a third from the same period in2014, the industry was still able to meet its goals.

Concerns about pandemic remain high

“We’re not expecting it to go back to 2014 levels, when it broke all records,” said Rob Roach, deputy chief economist for ATB Financial. “But we’re not even back to where we were during the recession of 2015-16.”

Ongoing concerns about the pandemic’s path and its impact on oil prices are among the factors that are keeping a lid on capital spending, according to Roach. In addition, he noted that the industry faces other concerns, including current and future pipeline capacity and transportation constraints, as well as the risk that OPEC+ will once again flood the market with oil.

Climate change and government policy limiting future production and demand are also factors, Roach says.

With so much uncertainty, Roach says it’s no surprise that new projects and hiring are slowing. Even if oil prices skyrocket next year as some analysts predict global oil prices could reach $120 US next summer, the 2014 boom-time sentiment is unlikely to return.

“Even if we got those prices, we would still face the same limitations,” Roach said. “How long will it last, will OPEC change its mind on a dime and down goes the price, and what do we do long-term about climate change?”

Many Canadian oil and gas companies have spent the last year paying down debt, according to analyst Scott Norlin. After having to cut dividends in 2020, companies are using this year’s high prices to recover value to shareholders. (Suncor Energy Inc. and Cenovus Energy Inc. recently doubled their dividends.)

Norlin expects industry spending to rise in 2022 as companies reach debt targets and start investing in new projects. But he estimates total spending for 2022 will be around $31 billion.

“Not to say there’s not going to be growth, but I don’t think there’s going to be those massive, massive growth rates,” Norlin said. “With rising prices, there’s always that knee-jerk reaction to bring rigs on and try to drill as much as you can, but operators have done a really good job (this year) of staying disciplined. Especially in Canada, they’ve sort of learned to live within cash flow.”

It expects 6,457 oil and gas wells drilled in 2022, up over 25% from 2021 and back to pre-pandemic levels, according to the Canadian Association of Energy Contractors.

Original source material for this article taken from here