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Board suggests oil industry will maintain production standards

Canada’s oil extraction industry is being challenged by the prolonged and sharp decline in prices. In October, the industry leaders said they expected to post pre-tax losses of $2.
Oil well, pump

Canada’s oil extraction industry is being challenged by the prolonged and sharp decline in prices.

In October, the industry leaders said they expected to post pre-tax losses of $2.1 billion this year compared with a profit of about $6 billion in 2014, according to the Conference Board of Canada’s Canadian Industrial Outlook: Canada’s Oil Extraction Industry.

“While Canadian oil companies have acted swiftly, delaying capital investment, cutting expenses and reducing employment levels, profitability has plummeted,” said Michael Burt, director of industrial and economic trends for the Conference Board of Canada. “However, these cost-cutting efforts should begin to bear fruit next year, as the industry is expected to slowly return to profitability, even as oil prices remain low by recent standards.”

Future global demand for crude oil will be limited by weaker economic growth prospects, the report suggested.

Despite low prices, investment cutbacks, and a sharp decrease in conventional drilling activity, Canadian crude oil production is expected to continue growing over the next five years.

The Conference Board’s assessment went on to predict that crude oil prices are expected to remain weak in the near term, as supply exceeds demand. Limited by weaker economic growth prospects and the ongoing trend of decreasing oil intensity, the outlook for global demand for oil has weakened. The U.S. Energy Information Administration (EIA) and the International Energy Agency (IEA) forecast that growth in crude oil demand is expected to decelerate over the medium term, rising by an annual average of 1.1 million barrels per day (MMb/d) compared with 1.5 MMb/d over the previous five years (2010-14).

Crude oil prices are expected to start recovering in 2016, but are not expected to return to their 2014 levels over the next four years. Low oil prices have taken a toll on producers’ revenues and cash flows, resulting in a significant contraction in investment intentions. Industry revenues were expected to fall by 22 per cent in 2015 with the slow recovery beginning in 2016. Indeed, the report said, from 2016 to 2019, revenues are expected to grow at an annual average rate of 14 per cent, driven by a combination of slowly recovering oil prices and increases in production. Likewise, investment levels that dropped significantly in the short term will slowly return.

Seven of Canada’s largest oil producers have reported their combined capital expenditures will be approximately 39 per cent lower than 2014 as they exit 2015, a testament to the effect lower crude oil prices are having on the Canadian industry.

Despite this drop in investment spending, industry production will continue to grow over the next five years. Given that oil sands projects require large upfront capital investments and that construction and lead times can span several years, projects that are currently under construction will continue to be developed even in a low-price environment. Thus, past and ongoing investments will continue to drive production higher, despite the ongoing challenges, the Conference Board analysts said.