Varcoe: Canadian producers more battle-tested than U.S. to withstand strain of lower oil prices

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Crude prices sagged below US$60 a barrel on Tuesday, but Canadian oil and gas executives, investors and analysts believe the sector is battle-tested and better positioned to withstand a storm than the industry south of the border.

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Benchmark West Texas Intermediate crude prices fell $1.12 to close at $59.58 a barrel on Tuesday — its lowest point since 2021 — continuing a slide that began last week amid tariff worries and concerns about increased OPEC+ production. On Wednesday, oil dropped below $56 a barrel at one point, but closed the day at $62.35.

Cenovus Energy CEO Jon McKenzie, chair of the Canadian Association of Petroleum Producers, said Tuesday the price drop has been “short and violent,” but he doesn’t expect much to change for Canadian companies in the short term.

He pointed out the industry became more efficient after oil prices tanked a decade ago.

“We’ve been at this a lot longer than the U.S. industry . . . There’s no doubt in my mind their sustaining capital requirements are a lot higher than what we have here in Canada,” McKenzie said in an interview.

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“I suspect you’re going to continue to see the resiliency of Canadian companies outpace the international peers in any kind of downdraft in commodity prices.”

At the annual BMO CAPP Energy Symposium in Toronto, company CEOs and investors spoke about the ramifications of the sudden drop in equity and oil markets, the future of LNG development, and the ability of the sector to handle more turbulence after enduring the collapse of oil prices in 2015 and the pandemic five years ago.

On the Toronto Stock Exchange, the S&P/TSX Capped Energy Index fell 4.8 per cent. It’s down almost 20 per cent over the past five trading days, while oil prices have dropped $12 in the past week.

Having paid down billions of dollars in debt in recent years, Canadian producers only need oil to average $51 a barrel to keep output flat and pay planned dividends, said Eric Nuttall, a senior portfolio manager with Ninepoint Partners.

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“I contrast that to the U.S., where we think below $60, they are in the death zone — cash flow is not enough to sustain production,” he said.

“U.S. shale is much more susceptible to an oil price shock.”

On Tuesday, a note by S&P Global Commodity Insights said if global oil prices slumped to $50 a barrel, onshore U.S. oil output could decline by more than one million barrels per day over 12 months.

The U.S. is the largest oil producer in the world, with output averaging 13.2 million barrels per day last year, and the Trump administration is pushing for more domestic output.

“Production is still growing right now and activity is relatively high. Yeah, of course, if prices go lower from here, that is going to cause concerns among producers,” U.S. Energy Secretary Chris Wright told CNBC in an interview.

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“We’re allowing pipelines to be built (and) export terminals. So clearly, these are signals that are going to increase supply.”

But a new report by Enverus Intelligence Research pointed out that the Canadian oilsands have a “low break-even advantage” below $50 a barrel, and that recent weak oil price and U.S. trade tensions “will only marginally slow down growth.”

It projects the oilsands will grow by about 400,000 barrels per day (bpd) by the decade’s end, mainly from thermal projects.

In a survey last month conducted by the Federal Reserve Bank of Dallas, U.S. oil and gas executives said they need US$41 a barrel to cover operating costs for existing wells and, on average, they require $65 a barrel to profitably drill a new well.

In Canada, that figure would be $45 a barrel, said BMO Capital Markets analyst Randy Ollenberger.

“Canada is positioned very, very well,” said Dean Setoguchi, CEO of energy infrastructure firm Keyera Corp.

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“We are very rich in resource, and we are still in earlier stages of development than, let’s say, the major U.S. basins. So our cost of supply is very, very competitive.”

But how will producers respond to the volatility if it continues?

At this point, analysts don’t expect major changes in capital spending programs, pointing out natural gas prices should improve as the LNG Canada project begins operations later this year.

“It’s too early (to say) if it’s going to have any kind of lasting effect,” Tourmaline Oil CEO Mike Rose said of the turbulence.

“We’ll just see what happens over the next month or two, and what our second half 2025 capital program should look like. It hasn’t caused us to change any of our longer-term plans.”

“Nothing has changed at this point. If we have to reduce some capital, that’s a quick and easy thing to do,” added Doug Bartole, CEO of InPlay Oil Corp.

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The sector is expected to direct $39.5 billion to capital expenditures this year and potentially increase output by 2.2 per cent, notwithstanding weaker commodity prices or further trade war fallout, according to Calgary-based Studio.Energy.

Energy economist Peter Tertzakian said if oil prices remain around current levels, it would affect oilpatch capital spending over time, but not enough to lead to serious production loss this year.

Tertzakian expects Canadian industry revenues to reach $172 billion if oil averages $66 a barrel this year, but that figure would decline by about $12 billion if oil averages $61 throughout 2025.

He pointed out that Canadian producers benefit from the lower dollar, relative to the U.S. greenback, and a narrower price discount for Western Canadian Select heavy oil recently. The industry has also seen increased consolidation, creating larger companies with more scale.

And he doesn’t believe oil prices will stay below $60 a barrel for a long period, as the supply side would respond.

“You would see high-decline shale (oil) production in the United States fall off fairly quickly, before, certainly, our oilsands would fall off,” said Tertzakian, founder and president of Studio.Energy.

“We are in decent shape to weather the storm. That doesn’t mean it leads to robust and healthy economics, but certainly, we can weather the storm.”

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com

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