Expect oil prices to remain low for the next few years, a new Canadian Energy Research Institute (CERI) report says.
This will mean reduced investments, a lower gross domestic product and decreased employment, taxes and royalties for Western Canada’s conventional oil industry for at least the next two to three years, according to the study.
Oil production in Western Canada will drop to less than 1.1 million barrels per day by 2017, from more than 1.3 million barrels per day in 2014, CERI said.
From that point, production will gradually increase and stabilize at 1.4 million barrels per day for the last half of the forecast period, according to the report, entitled Western Canada Crude Oil Forecasts And Impacts (2015-2035).
Western Canada’s conventional oil industry is still in good shape, Allan Fogwill, president and chief executive officer of CERI, told the Daily Oil Bulletin. “We do see some challenges in the first few years, out to 2017, and that’s mainly because of the low oil price so there’s going to be a reduction in production over the next three years and it will slowly ramp up as the projected oil price ramps up.”
Based on the U.S.Energy Information Administration’s (EIA) latest oil price forecast and some of CERI’s own adjustments, a recovery is forecasted to start in 2017.
The oil price is projected to rise from about $80 a barrel in 2018 to a little less than $130 a barrel in 2035, all because of supply and demand, said Fogwill.
“What we’re seeing now is a depressed price combination of new and excess supply, between one [million] and two million barrels a day, and weak demand. We’ve seen economic indicators from Europe and China be less than robust, which is therefore going to diminish the demand for oil, although just in the last couple of days we’ve seen some good U.S. economic news and that’s actually had a positive impact on the market.
“So it’s going to be your typical supply-demand story all through the forecast period and indications are that the low-growth environment that we’re in right now will move to something that’s more typical and therefore be able to absorb the supply capacity that’s coming online.”
The report says crude oil development and production will contribute $1.31 trillion in GDP over the next 20 years, and create 5.65 million person-years of employment. The annual GDP contribution is approximately $65 billion.
The number of jobs generated by this sector will rise to 346,000 in 2035 from 131,000 this year, says the study.
The purpose of the report is to extend the work done by a similar one in 2014, by investigating the potential effects of declining oil prices and producers’ reduced capital budgets on oil activity in Western Canada.
The report is also intended to describe the economic impacts associated with forecasted drilling and production in terms of GDP, taxes paid to the provincial and federal governments and future employment for the industry.
At the time of the 2014 report, CERI’s forecast for future crude, tight and shale oil developments was predicated on the assumption that oil well activity for Western Canada would continue at the 2013 drilling level for 2014 to 2016 followed by a one per cent decline out to 2020 and a five per cent decline per year for the remainder of the forecast. This view was considered conservative about future events and did not reflect the size of the remaining resource basin.
But analysis of the provincial regulator licensing files for the first six months of 2015 and extrapolating out to the end of the year suggests that new oil well licences for 2015 will be reduced by 45 to 55 per cent from 2014 levels, says CERI.
CERI’s Canadian oil forecast model takes into account new well connections and applies initial production rates, decline type curves and other modeling parameters to determine a Western Canada crude oil production forecast.
CERI used the historical oil well licensing files from the Alberta Energy Regulator (AER), the B.C. Oil and Gas Commission and Saskatchewan Energy and Mines to estimate the decline in new oil well drilling based on actual recorded oil well licences up to June 2015 and extrapolating to the end of the year.
CERI’s analysis determined that Alberta would license 1,344 new oil well connections for the year 2015 while Saskatchewan was expected to bring on 1,900 new oil well connections for 2015.
This reduced level of drilling is assumed to be repeated for 2016 followed by an upward trend in 2017 mimicking the movement in the oil price forecast as suggested by the EIA.
Applying these reductions to the new well connection forecast results in a pullback in production levels, it says.
British Columbia
During the next 20 years, capital investments in the development of new oil wells in British Columbia will total $1 billion, according to the study.
Revenues from crude oil domestic sales and export sales will total $9.8 billion or average $500 million per year.
Total Canadian GDP impacts are estimated at $11.6 billion: 90 per cent within the province of B.C. and 10 per cent across the other provinces and territories.
Taxes directed to the federal government will total $1.1 billion and $700 million to the provincial government.
B.C. employment (direct, indirect and induced) will grow from 2,100 jobs in 2015 to 2,450 by 2035.
Alberta
CERI’s study examines the crude oil forecast and associated economic impacts of crude oil developments, including both existing and future drilling activity within the province of Alberta over the period 2015 to 2035.
It covers crude, shale and tight oil activity, using vertical and horizontal wells.
The study’s oil price forecast from the EIA was modified by CERI for the years 2016 and 2017 to reflect a continuing low market situation, allowing time for global demand to catch up with global supply.
It says that between 2015 and 2035, capital investments in new oil wells in Alberta will total $261 billion or average $12.5 billion per year.
Revenues from crude oil domestic sales and export sales will total $481 billion or average $23.2 billion per year.
Over that 20-year period, total Canadian GDP impacts are estimated at $949 billion — 89 per cent within the province of Alberta and 11 per cent across the other provinces and territories.
Taxes directed to the federal government will total $108 billion and $66 billion to provincial governments, and employment (direct, indirect and induced) will grow to 285,000 jobs by 2035 from 100,000 in 2015.
Saskatchewan
CERI assumes that Saskatchewan’s new oil well connections for 2015 will drop by 45 per cent from 2014 levels, following the same path as Alberta’s.
This assumption is because budget cuts by producers will be felt across the industry and across corporate oil plays. CERI has also assumed that these cuts in new well activity will continue through 2016 before starting to recover because of the forecasted recovery in the WTI oil price
Capital investments in the development of new oil wells in Saskatchewan will total $133 billion.
Revenues from crude oil domestic sales and export sales will total $209 billion.
Total Canadian GDP impacts are estimated at $347 billion, 89 per cent within the province of Saskatchewan and 11 per cent across the other provinces and territories.
Taxes directed to the federal government will total $30 billion and to the provincial government, $26 billion.
Employment (direct, indirect and induced) will grow to 59,000 jobs by 2035 from 29,000 in 2015.
