A
bucket loader digs for oil sands at a mine in this aerial photograph
taken near Fort McMurray, Alberta, Canada, on June 4, 2015.Photographer: Ben Nelms/Bloomberg
OPEC took a swing at U.S. shale and knocked down Canada.
Threatened
by surging production from North America, the Organization of Petroleum
Exporting Countries has been pumping above its quota for 17 months as
it seeks to take market share from higher-cost regions. The resulting 60
percent price crash is hitting Alberta harder than Texas.
Canadian
producers are struggling to cut the cost of extracting bitumen from the
oil sands, and their other wells are failing to match the efficiency
gains of U.S. rivals, a Bloomberg Intelligence analysis shows. While
output keeps rising in the Permian Basin, the largest U.S. shale play,
companies are slowing output from wells in Alberta and have shelved 18
oil-sands projects during the downturn, according to ARC Financial Corp.
“OPEC
wants to hinder shale from its strong growth trajectory but there are
higher-cost producers, such as in the oil sands of Canada, that are in
the line of fire,” said Peter Pulikkan, an analyst at BI in New York.
“Shale will eventually be impacted but it’s not the first on the list.”
New Policy
In
a policy shift a year ago, the 12-nation cartel decided against
propping up oil prices, keeping its output target at 30 million barrels a
day even as the supply glut worsened. It has exceeded that ceiling
since June 2014 and pumped 32.2 million barrels a day in October,
according to data compiled by Bloomberg.
In Alberta, high
extraction costs and oil price discounts relative to global benchmarks
are poised to continue crimping output, Pulikkan and BI analysts Michael
Kay, Gurpal Dosanjh, Andrew Cosgrove, Rob Barnett, Cheryl Wilson and
William Foiles said in research published Wednesday. Production,
excluding bitumen extraction, dropped about 13 percent this year through
July, That compares with a roughly 19 percent increase in output from
Permian wells over the same period.
“We are one of the
highest-cost basins in the world,” said Rafi Tahmazian, a Calgary-based
fund manager at Canoe Financial LP. He predicted more job losses as
Canadian producers try to save money and stay profitable with low
prices. “We’re constantly working to bring down those costs.”
U.S.
crude has plummeted from a $107.26 closing high in New York on June 20
of last year to just above $40 a barrel. The Canadian heavy-oil
benchmark is trading at about $15 less than that.
Slower Rebound
Parts
of Canada’s energy industry have been resilient. Existing oil-sands
projects have kept production flowing and the weaker Canadian currency
has helped exporters. Still, Canadian production is poised to be slower
to rebound than U.S. shale in a market recovery.
New oil-sands
projects require long investment lead times and the Canadian dollar will
strengthen along with oil prices, eroding the currency advantage,
according to Manuj Nikhanj, co-head of energy research at ITG Investment
Research in Calgary. Investors are shying away from financing Alberta
producers because of an increase in provincial levies, Nikhanj said in
an e-mail.
There’s a risk that the U.S. eats all of Canada’s
lunch, according to BI’s Pulikkan. Producers have been awaiting higher
prices to turn on a backlog of U.S. shale wells that have been drilled
and capped. Once they come on stream, they could push prices back down,
rendering Canadian output uncompetitive yet again, he said.
“Before they even have a chance to get off the ground, shale will likely beat them to the punch,” Pulikkan said.
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