Canadian oil producers, already under stress before this month, now face deeper spending cuts and possibly a wave of consolidation due to the twin shocks of the global spread of coronavirus and the Saudi-Russia oil price war.
The TSX energy index has dropped 57%, showing the strain on producers in the world’s fourth-biggest oil supplying country since the price war began and the coronavirus pandemic slashed global energy demand.
“We have never experienced anything like this in the history of our energy industry, layered on top of five years of economic and social fragility,” Alberta Premier Jason Kenney said on Wednesday. “We have an industry that’s on life support.”
The Canadian government on Wednesday announced broad economic supports and said it was talking with the oil and gas sector about separate measures.
On average, a Canadian oil sands producer can generate enough cash to operate with a U.S. benchmark West Texas Intermediate (WTI) price of $37.30 a barrel, according to CIBC analyst Jon Morrison. But the net price of Western Canada Select (WCS) heavy oil fell this week to well below $10 per barrel, factoring in its discount to WTI to reflect transportation and refining costs.
Canadian producers have cut some $3 billion in capital spending, led by deep reductions by Canadian Natural Resources , Husky Energy and Cenovus Energy .
“At $10 (per barrel) nothing works,” said Len Racioppo, managing director of Coerente Capital Management, which holds shares in Suncor Energy , Canadian Natural and Cenovus. “There have to be fewer companies. You have to be big and you have to be low-cost.”
Pipelines in Canada were already congested, leaving Alberta with more oil than it can move. That led to the provincial government last year restricting output.
“We’re nearing that point of maximum pessimism but we don’t even know what the fallout of (coronavirus) is going to be,” said Ryan Bushell, president of Newhaven Asset Management, which owns Canadian Natural shares.
More cuts are likely, said Jackie Forrest, senior director of the ARC Energy Research Institute. Canada produced 4.9 million barrels per day (bpd) in February, the Canada Energy Regulator estimated. Since the price war started, less than 100,000 bpd has been curtailed, according to Eight Capital.
Even so, Canada has some advantages. Unlike U.S. shale wells, the long-life oil sands do not require high capital reinvestment annually, Forrest said.
The unique nature of Canadian oil sands production, which uses mining or steam-driven extraction, makes complete facility shut-ins technically problematic.
Canadian oil sands companies have already been restraining spending for years due to their pipeline problems, Bushell said.
“Our companies have been starved for capital for longer, so they’re more financially sound and able to deal with this.”