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The impact of the novel coronavirus (COVID-19) has pushed the
price of many heavy crudes to beneath US$20/bbl in recent weeks. In
western Canada, which is both geographically distant from end
markets and features particularly heavy, sulfurous crude grades,
prices have fallen to well below US$10/bbl.
Around the world, planned spending has been cut by oil and gas
companies as they have sought to preserve their cash flow through
what will likely be a period of protracted very low prices. IHS
Markit estimates that in western Canada, over $US 6 billion in
spending has already been cut. The bulk of these cuts has been
borne by the large oil sands producers, but the impacts are far
broader. There have been sizeable spending reductions for
conventional, unconventional, midstream and even petrochemical
projects.
Figure 1: Announced western Canadian energy capex cuts
As a result of these cuts, western Canadian drilling
activity—already at near record lows—is expected to fall
further with potential for under 3,500 wells being drilled in 2020.
This is a reduction of nearly a third from IHS Markit's January
2020 outlook and is particularly significant if one considers
approximately 1,300 wells have already been drilled in the first
quarter. If anything, there is likely more downside risk than
upside to our base case.
For the Canadian oil sands, a year that had started with
cautious optimism and was on pace to record the first uptick in
upstream spending since the 2014/15 price collapse has quickly
evaporated. IHS Markit's preliminary estimate indicates upstream
oil sands capex in 2020 may be at their lowest levels in over 15
years. To put that in perspective, 15 years ago oil sands output
was two-thirds what is was in 2019.
Figure 2: Oil sands capital investment
Western Canada is accustomed to price volatility. This is the
third period in the past half-decade that producers have seen heavy
oil prices beneath US$20/bbl. However, the scale of this demand
shock is unprecedented and the impact on the basin is expected to
be protracted, deep with long lasting ramifications for western
Canadian output, the people that work in the sector, and the
overall economy.
Kevin Birn is Vice President of the North American Crude
Oil Markets team at IHS Markit.
Michael Muirhead is a Director of Consulting at IHS
Markit. Ashok Dutta is a Senior Analyst of the North American Crude
Markets at IHS Markit.
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Jun 30
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