CALGARY: Oil’s sharp decline into bear market territory this week threatens $19 billion in anticipated capital spending by Canadian energy producers and could slow down industry activity, according to analysts. This week, West Texas Intermediate oil tumbled to its lowest intraday level since August 2016 to US$42.05 per barrel, recovering slightly to US$42.74 Thursday, but well below the threshold necessary to spur new investment in many plays across the Western Canadian basin. If current oil prices persist, they would take a bite out of oil producers’ cash flows, which is the biggest driver of new capital spending in the basin, according to Jackie Forrest, director of research at ARC Energy Research Institute.
WTI prices dropping from US$53 per barrel to US$43 per barrel for 12 months would see anticipated capital spending shrink to $23 billion from $44 billion, similar to 2016, which saw one of the lowest capex spending in years, Forrest said. “You would see about half as much drilling and activity associated with oil and gas if prices stay in this range over the course of 12 months,” Forrest said. “There is a scenario that oil prices do stay in this level and it’s something that companies have to be thinking about — can they survive these type of prices,” Forrest said, adding that some firms may need to cut their dividends to protect their cash flow. While current oil prices will stress higher-cost producers, some Canadian producers are breaking even or even turning an operating profit at current prices.
