CALGARY – Oil and gas companies are opening their wallets, emboldened by lower oilfield costs, a favourable new Alberta royalty regime and optimism that commodity prices will at least stabilize next year.
Producers that can afford to spend more are signalling a willingness to do so in budget announcements this fall. That’s despite a forecast issued last week by the Paris-based International Energy Agency of more supply and little demand growth in 2017, suggesting continued poor global oil prices.
On Monday, benchmark New York crude oil prices dropped to a three-month low of US$43.32 per barrel. Although they recovered Tuesday, they remained well below mid-2014 levels of over US$100 per barrel.
“If you’re optimistic for 2017 pricing being higher and you have a new lower cost structure, that’s where you’re seeing some of the capital expenditure increases going forward,” said AltaCorp Capital energy analyst Thomas Matthews on Tuesday.
“Now you’re seeing the guys that can make money in those plays spending more money in those plays.”
The list of companies spending more this year includes giant Canadian Natural Resources (TSX:CNQ), which increased its 2016 capital spending budget by $700 million to do more conventional drilling in Alberta in the last months of the year.
Mid-sized companies that have announced budget increases for 2017 include Crescent Point Energy (TSX:CPG), Whitecap Resources (TSX:WCP), Enerplus (TSX:ERF), Kelt Exploration (TSX:KEL) and Painted Pony Petroleum (TSX:PPY) — the five budgets together add up to half a billion dollars more spending in 2017 than what they initially planned in 2016.
“We have positioned Whitecap to be defensive when required with the ability to be more offensive when the environment presents itself,” Whitecap CEO Grant Fagerheim said in an email.
“Although we certainly have some prevailing headwinds at this time, we are quite constructive on the energy space going forward.”
Matthews said while some companies with healthy balance sheets will spend more, many others remain “capital constrained” on the sidelines, which makes it difficult to say whether overall Canadian production and drilling will show a net increase.
The budgets announced so far are usually described as “preliminary,” he said, adding producers plan to spend more in the second half of the year when the commodity price picture might be clearer.
He said most of the oil producers are counting on average oil prices of between US$50 and $55 per barrel and will likely cut back if prices remain in the $40s for too long.
In its recent spending announcement, Kelt Exploration said it was already drilling wells to take advantage of better terms under the Alberta government’s new royalty framework announced in July. The new rules officially take effect Jan. 1 but the government has allowed early applications for new wells to be drilled this year.
Alberta Energy said earlier this month that it had approved applications for 129 new wells under its new royalty regime.
The Petroleum Services Association of Canada has forecast 4,175 wells to be drilled in Canada next year, up about six per cent over 2016, but 63 per cent lower than the number drilled in 2014.
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