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One month ago, IHS Markit estimated that capital expenditure
cuts within the western Canadian oil and gas sector would total
over US$6 billion. As the grim reality of extreme low prices took
hold, companies have only further slashed spending, with announced
cuts now exceeding US$8.4 billion (C$12 billion). The oil sands
sector accounts for the bulk of this unprecedented reduction;
investment there is on track for its lowest level in over 15 years.
However, the impacts are much broader than the oil sands, as
investment in all corners of the Canadian energy sector is being
culled.
Figure 1: Year-to-date announced western Canadian energy capex
cuts (as of 8 May 2020)
Production cuts are also mounting. As of 8 May, more than
700,000 b/d of output reductions had been announced. Again, the oil
sands, as the largest source of western Canadian supply, accounts
for the bulk of the reduction, but the entire basin is suffering.
The output reduction is evident in reduced utilization of key
export pipelines, which prior to the pandemic were chronically
oversubscribed.
Figure 2: Year-to-date announced western Canadian production
cuts (as of 8 May 2020)
Notably, four-fifths of the announced production cuts have come
from large western Canadian producers, with less visibility to
smaller producer actions which are almost assuredly cutting output
as well. For this reason, IHS Markit expects that the actual
production cut is greater than what has been publicly announced -
and that more volumes may still come offline in the coming
months.
IHS Markit estimates that 2Q20 western Canadian production may
decline by over 1.1 million b/d compared to 4Q19. With the majority
of announced and anticipated contraction coming from the oil sands,
an immediate and dramatic secondary diluent demand shock is in
store for both domestic providers of condensate for oil sands
blending as well as imports brought from the United States.
The majority of Canadian oil sands output is anticipated to
recover by early 2021, with conventional and unconventional
production declines continuing well into 2021. Some volumes will be
permanently lost as less productive wells are permanently shut in.
As people reemerge from their homes, and demand begins to recover,
production should begin to come back into the market. However, with
certainty the Western Canada Sedimentary Basin will be changed for
quite some time.
Celina Hwang is a Senior Research Analyst for the North
American Crude Oils Markets team at IHS Markit. Karen Kuang is a Senior Analyst at IHS
Markit. Kevin Birn is a Vice President for the North American Crude
Oil Markets team at IHS Markit.
