Despite Higher Prices, Canadian Oil Extraction Industry Still in Survival Mode

OTTAWA, March 13, 2017 /CNW/ - Although Canada's oil producers are expected to benefit from both higher prices and rising production, profitability will remain elusive for the industry – with losses expected for the third year in a row. Pre-tax losses in Canada's oil extraction industry are projected to reach just over $1.1 billion this year, according to The Conference Board of Canada's latest outlook for the industry.

 "Following three consecutive years of oversupply, global crude oil markets are finally moving back into balance. Global demand is expected to increase in coming years, suggesting that prices will continue the upward trajectory that began late last summer," said Carlos A. Murillo, Economist, The Conference Board of Canada. "Despite recent positive developments, however, we do not expect the industry's bottom line to return to positive territory until the fourth quarter of this year given that it started from such a weak position."

Highlights

• Pre-tax losses in Canada's oil extraction industry are projected to reach just over $1.1 billion this year, following over $8.6 billion in losses registered for 2016.
• At just over $22 billion, or about a third of 2014's peak levels, industry investments will continue to be weak as a result of constrained cash flows and the winding down of a handful of large capital projects.
• North America's light sweet crude benchmark—West Texas Intermediate—is estimated to average US$55 per barrel this year.

Growth in demand is projected to outpace supply this year and next, pointing to a more balanced market for the near term. Global crude oil demand is expected to increase by an average of more than 2 million barrels per day (MMb/d) over the next two years, a pace which is more than 50 per cent quicker than the average annual increase over the previous five years. Meanwhile, global production is expected to increase by an average of 1.3 MMb/d in 2017 and 2018. This will put some upward pressure on prices, which are expected to average US$55 per barrel this year. However, with inventories still elevated, fewer unplanned outages, and available spare production capacity, prices are not expected to return to pre-crisis highs in the near future.

Nonetheless, higher prices will be good for the industry's revenues, which we expect will increase at an average annual pace of close to 20 per cent over the next 5 years. This is a stark contrast to the average annual contraction of close to 10 per cent in revenues observed in the previous five years. However, stronger revenue growth alone will not be enough to return the industry to profitability before 2018. As a result, investment in the industry is expected to remain weak for a number of years still.

Meanwhile, recent conditional approval by Canada's federal government of Enbridge's Line 3 replacement and Kinder Morgan's Trans-Mountain expansion projects also provide some cause for optimism. The two projects represent a total of close to 1 MMb/d of additional crude export capacity over the forecast. What is more, TransCanada's Keystone XL and Energy East projects could further add close to 2 MMb/d of export capacity from Western Canada. In total, these pipelines can nearly double today's crude export pipeline system capacity and result in over $30 billion in infrastructure investments across Canada.

"While approval of these projects is good news for the industry, the reality is that new capacity is needed now, and the benefits of increased market access and better prices for the industry will take time to materialize. What is more, these projects are unlikely to be all needed at the same time," added Carlos.

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SOURCE Conference Board of Canada

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