It’s no secret that oil is important to Saskatchewan and as a share of the industry, it’s even more important to Estevan. Southeast Saskatchewan is an energy producer for the province, the country and the world. Estevan is the Energy City.
When the price of its No. 1 commodity is cut in half, there are a lot of questions about what this means for the economic activity around the city. How much belt-tightening will there be? If there is a slowdown in the oilfield, that will send ripples through every industry in Estevan, not just service companies but restaurants, shops and every other facet of the business community.
Attention will be paid to the constant flux of the price of oil, which in 2015 at a little more than $53, down from about $95 from one year ago and a June 2014 high of more than $107. As of Monday, the commodity was trading at below $46.
Oil prices have been steadily declining since July and have been sinking further and faster since October.
Ed Dancsok, assistant deputy minister of economy, told the Mercury last week in the process of doing revenue forecasts for the upcoming provincial budget, watching the price of oil is a daily distraction.
“Every day it seems we get new information,” he said.
The question is: What will oil companies be doing in the short term and how might that impact budgets immediately?
Speaking with oil companies in late 2014 and into the start of this year, Dancsok said he has heard “as many different answers as we have companies out there.”
“If this is a sustained drop, we’re going to see all of the industry re-evaluating,” said Dancsok, noting a sustained drop would mean little to no bounce back of the price in the next six months.
The general word at the moment is that expenditures will drop, but that doesn’t necessarily mean there will be fewer wells drilled or less oil pumped.
“The larger (companies) are really looking at cost-cutting measures. That might translate into seeking lower service charges from the service sector,” noted Dancsok. “I’ve heard they’re looking for as much as a 25 per cent discount for those types of services.”
If there is a drop like that in front-end costs, that may allow companies to continue drilling on their drilling plans.
“I think there will be a concerted message from the producers to these service sectors saying, ‘you have to share in some of this drop in the price of oil by lowering your cost of services,’” said Dancsok, adding, “or you’re not going to get the business because companies you aren’t going to see a rate of return hat’s positive are just simply not going to drill the wells.”
Dancsok said in Saskatchewan, companies still enjoy a rather favourable investment market, noting they can get by on the lowest oil prices and still break even. He said there will likely be deeper slowdowns in the United States before those same circumstances hit southeast Saskatchewan. In North Dakota, he said it costs $8.5 million to drill and complete the production of a well compared with $3.5 million in Saskatchewan. Shallower wells contribute a large part to this discount rate.
In their 2015 budget report, Cenovus Energy said they will be maintaining production at conventional oil operations, and Reg Curren, senior media relations adviser with Cenovus, noted their enhanced oil operation around Midale and Weyburn will be considered part of that conventional oil.
“It has been a very stable part of our operations for many years,” Curren said, noting it has typically produced 16,000 barrels per day. “It’s a very predictable, reliable asset. We know it. We know how to work it.”
For Cenovus, he said, the plan is status quo. However, CEO Brian Ferguson has talked about flexibility and monitoring the situation.
“We have a very long-term view, and that goes to all of our projects, whether it’s oilsands or a project like in Weyburn,” added Curren. “We’ve seen ups and downs in the oil and gas industry for many years.”
He added Cenovus will be focusing on maintaining current operations and looking at cost savings, noting the company has identified $400 to $500 million in capital savings by 2018. None of those efficiencies are expected to include a reduction in labour.
Regarding Crown land sales, which typically see the most action happening in the southeast area, Dancsok said a drop in sales shouldn’t be entirely tied to oil price. He said land sales hit a peak five years ago with record highs, but now companies have a lot of land in their inventory and may not be looking to acquire new hectares. Still, the price of oil isn’t encouraging more land grabs.
“We’ve already seen a drop off across all of Western Canada. Companies that have money are spending it drilling. They already have a lot of land. I think we’ll see soft land sales for the next short while, and especially if this is a sustained drop,” Dancsok said.
“The best cure for low oil prices is low oil prices,” he added. “There are going to be market forces that come into effect that cause increased demand. Right now we’re seeing soft demand in the United States as well as in India and China.”
As a commodity, oil price fluctuates constantly, and as it becomes more affordable, there is the expectation that a new demand will be established.
Until that happens, there isn’t much to do but watch the markets.
