For an energy veteran like me, North America’s oil industry reminds me of “That’s Life,” the classic Frank Sinatra tune.
After every oil price crash I can imagine Ol’ Blue Eyes crooning, “Each time I find myself flat on my face / I pick myself up and get back in the race.”
And so it is, after two-and-a-half years of being dragged on the pavement, the North American industry is getting up and back into the race this year. Capital budgets, rig counts and cash flows are all headed up. Companies with quality rocks underneath prime postal codes are already singing.
The tune in Canada sounds positive going forward, albeit with quiet refrain.
Light, tight oils and liquids in unconventional plays are very much getting back into the race, just as they are in Texas and Oklahoma. And developing natural gas reserves in BC and Alberta is proving to be viable at much lower prices than hitherto thought. On the other flank of the Western Canadian Sedimentary basin, oil sands production is cash flow positive at current commodity prices, but the starting gun for new investment into the region will need a better price outlook than the low-$US 50/B range.
Much as every race is different, so too is every recovery from a price crash. For example, this pick-me-up is notably different than what happened after the Financial Crisis of 2008. In fact, many of Canada’s producers are leaner and meaner competitors, hungry for a win in 2017, more than they were during the recovery of 2009.
Here are four reasons why:
This Downturn Has Lasted Much Longer – The 2014 episode has had “lower-for-longer” prices than after the Financial Crisis. That doesn’t sound like a good thing. But painful as this recent downturn has been, the longevity of the malaise has forced companies to high-grade prospects, streamline operations, innovate for efficiency and cut out excess costs. The recovery from the Financial Crisis was driven by price. This recovery is a race to achieve superior productivity and innovation, which is a decidedly more positive and enduring dynamic.
Innovation is in Early Innings, not Late – Less than a decade ago, the industry was still largely dealing with “mature” oil and gas fields, using middle-aged drilling and completion techniques. Since then companies have embraced the disruptive-innovation benefits of pad drilling and multi-stage hydraulic fracturing.
Some companies are singing, “Take Me Out to the Ball Game.” Rig productivity data coming out of this downturn shows that Canadian producers are in the early innings of innovation, beginning to materially realize learning curve effects that are comparable to some US plays.
The Canadian Dollar is Lower – Banks in Canada were hailed as heroes for making it through the Financial Crisis, post-2009. In part, that’s why the Loonie flew toward parity with the US dollar. Today, it’s the reverse; the Canadian dollar has descended to 75 cents relative to its US counterpart. So not everything is bigger in Texas: $50 barrel in Midland is really $70 in Calgary.
The Sale is Over – Canadian production growth was clogging pipelines, backing up production and creating deeply discounted oil prices earlier this decade. But new rail terminals, optimized pipe flows and slowing oil sands growth have since taken the SALE sign off most grades of oil. Some sclerotic transport issues persist, but American markets are paying almost full price for Canadian oil compared to five years ago.
To be sure, the industry will continue to endure, “up and down and over and out” in 2017 and beyond. Environmental regulations, cross-border tax differentials, market access, geopolitics, and alternative energy systems are a few of the many challenges facing the industry.
But I know one thing: The oil and gas business has never been an easy one throughout its 150 year history. And yet it always manages to get back in the race.
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