This article first appeared at The McAlvany Intelligence Advisor on Wednesday, January 14, 2015:
On Monday – the same day that UAE’s Energy Minister Suhall al-Mazrouel said that OPEC was going to stick to its decision to keep pumping regardless of price declines – the same day that Goldman Sachs issued its negative outlook for prices – when crude oil prices dropped in response by 5 percent, hitting a six-year-low of $44.20 a barrel on Tuesday, the CFO of Canadian Natural Resources announced he was going to expand both its production and its output into 2015 and beyond.
Chief Financial Officer Corey Bleber was oblivious to the carnage, saying that his company expected its overall output for 2015 to be at least seven percent ahead of last year’s, and that it would continue expanding its output for at least the next two years.
Oblivious might not be the right word. Impervious to the hand wringing among doomsayers about crude’s negative impact elsewhere might be a better one. For Canada’s oil sands development is vastly different from that other “unconventional” method: fracking of oil-laden shale miles below the earth’s surface. So unconventional in fact that the Wall Street Journal called it the “unloved stepchild” of fracking.
Oil sands is more accurately called crude bitumen, a product that is so sticky, so thick, so heavy and viscous that it will not flow at room temperature. In fact, it has been described as cold molasses. It has to be heated before it can flow through pipelines or be pumped into tanker trucks.
It’s also accurate to call Canada’s oil sands deposits the largest in the world, approximately equal to all of the world’s total proven reserves of conventional petroleum. The numbers are almost beyond comprehension. Canada’s Athabasca oil sands (which lie beneath 54,000 square miles in Alberta) contain nearly 2 trillion barrels of crude bitumen. By comparison, the world (as of last July) was producing 86.8 million barrels per day. That means that the Athabascan oil sands has enough oil to supply the world, all by itself, for 63 years.
Tar sands development requires massive amounts of capital, but once in place the oil fields take decades, not months or years, to play out. That’s why, on Monday, when oil prices dropped five percent, Canadian Natural Resources announced that it expects its capital spending to expand along with its overall output.
There’s another reason Canada is exempt from the oil price turmoil: once those fields are developed, the marginal cost of capturing the crude is less than $30 a barrel. As Cenovus Energy CEO Brian Ferguson explained:
It’s not well understood just how robust the oil sands are. If you stopped expansion of the oil sand tomorrow, you would have no decline in the production base for decades.
What we do is design for 30-year flat production lives.
As Steven Williams, CEO of Suncor Energy, another Canadian oil sands developer, put it: “We are able to take the perspective of pricing in decades” rather than in days or months.”
It was al-Mazrouel’s remarks, coupled with Goldman’s negative take, that dropped the market on Monday and Tuesday. OPEC will continue to pump oil regardless, he said:
[OPEC] cannot continue protecting a certain price. This is not the only aim of OPEC. We are concerned about the balance of the market, but we cannot be the only party that is responsible….
Translation: since we can’t get any cooperation from other members of OPEC, we’re going to continue to pump crude like crazy.
Goldman added to the downward slide:
We believe this bear market will likely be characterized by more of a U-shaped recovery in which markets take longer to recover and will likely [only] rebound to far lower prices [than] where they sold off from.
The firm provided its own translation: prices were likely to drop to $41 a barrel over the next three months, to $39 a barrel in another three months, before recovering slightly, to $65 a barrel, by the end of the year.
Outside of Canada, evidence of the carnage is piling up. Rig counts are down, cap ex is declining, oil stocks and junk bonds are in the tank, oil-producing states are going to lose an estimated $21 billion in revenues this year, OPEC members are already suffering severely negative cash flows, and Wall Street can’t even sell the energy bonds it’s already underwritten.
The pinch on banks that loaned out to energy developers is suffering a two-sided pinch: existing loan service will increasingly be threatened by oil’s price plunge, cutting into their revenue stream. For instance, nearly 15 percent of Wells Fargo’s investment banking fees last year came from the oil and gas industry while Citigroup’s was 12 percent.
But the reserves collateralizing those loans is also shrinking, turning a sure thing into tiny apologetic footnotes on their financials.
The only ones seeming to enjoy the downward slide are America’s consumers as the prices of oil, gasoline, and natural gas are saving them upwards of an estimated $1,000 a year.
And Canada; oblivious to all the hand wringing, oil sand developers there are impervious to the angst on Wall Street as they stick to their 30-year plan.
Wall Street Journal: Oil Extends Selloff on UAE Minister’s Comments
Wall Street Journal: UAE Minister Says OPEC Won’t Change Output Decision
Wall Street Journal: As Oil Slips Below $50, Canada Digs In for Long Haul
The New York Times: As Oil Prices Fall, Banks Serving the Energy Industry Brace for a Jolt
Marketwatch: 5 states most hurt by falling oil prices
Energy Insider: World Sets New Oil Production and Consumption Records