Oil and Gas - Looking forward and back

December 28, 2014

The sudden and unexpected drop in hydrocarbon prices was the big story of 2014. The reaction by the industry to these new prices will be the big story in 2015.

Looking back at 2014

• Oil’s international benchmark price dropped by 50 percent in 2014.  Sagging demand from weak economic growth in Europe and Asia helped push oil into a bear market.  The most shocking aspect of the precipitous price drop was that it was unforeseen even by professionals in the industry (CERI and the NEB, for example.)
• The price of natural gas fell this year from about $6.50 to right near $3.00 ( per MMbtu), a 50% decline. 
• There were numerous (more than 12) LNG projects proposed for the west coast of BC, mostly near Kitimat or Prince Rupert. Alas, there were no final investment decisions in 2014 on any project. The Canadian and US regulators, have given a nod to Canadian gas exports to Oregon go ahead to supply an LNG export facility in that state.
• In the oil sands some large projects went ahead when oil was $100 per barrel. For example, the giant Fort Hills oil sands mining project located, 90 kilometres north of Fort McMurray, received the go-ahead in late 2013. The project operator, Suncor, is scheduled to produce first oil as early as the fourth quarter of 2017 with a planned production capacity of 180,000 barrels per day. The mine life is expected to be in excess of 50 years at the current planned production rate. Fort Hills will create work for approximately 5,000 construction workers at the peak of construction and approximately 1,600 permanent positions when the mine and bitumen production facility are fully operational.
• Alaskans narrowly defeated a referendum in August which would have restored the punitive oil and gas taxation regime. Activity on the North Slope continued in earnest augmented with new gas finds in the Cook Inlet. 

Looking forward at 2015

The area ‘north of 56’ is a high cost area which will see a curtailment of activity in 2015.

• International oil prices are being affected by Saudi Arabia’s decision to not cut production. The recovery in Europe is weak to non-existant. Demand in Asia is down, so the prognosis is for price weakness to continue in 2015.
• The big three producers are all investing in North Slope of Alaska oil and gas plays. ConocoPhillips, for example, is very focused on converting resources that are in the ground into real oil in the Trans-Alaska Pipeline System (TAPS). The 2014 capital budget was up 50 percent from 2013 and is double the 2008-2012 average. The CD5 project, that was announced prior to SB21, is on schedule and on budget ($1 billion). The first oil from the project is estimated to flow at the end of 2015 with peak production at an estimated 16,000 BOPD in 2016.
• Nearly $6 billion has been spent thus far on Shell’s Arctic program, with little success to date. Now, 2015 could prove to be a make or break year for the Arctic. Shell may make a decision on drilling in the Chukchi and Beaufort Seas by March 2015. If it declines to continue to pour money into the far north, it may indefinitely put Arctic oil development on ice (pun intended). The crossroads comes at an awful time for Shell. Oil prices, hovering around $60 per barrel, are far too low to justify Arctic investments. To be sure, offshore drilling depends on long-term fundamentals – any oil from the Arctic wouldn’t begin flowing from wells until several years from now. That means that weak prices in the short-term shouldn’t affect major investment decisions.
• It remains to be seen whether oil sands projects will be cancelled and the extent that Alberta’s oil sands economy slows down.

 

Commentary

2015 will be a tough year for oil and gas producers ‘north of 56’. Offshore oil and gas looks like a non-starter in all arctic areas. The drop in natural gas prices does not help project economics for large-scale LNG projects.

Sources

• a)http://oilprice.com/Energy/Crude-Oil/If-Shell-Backs-Out-Arctic-Oil-Off-the-Table-for-Years.html



• b)http://forthills.suncor.com/



• c)http://www.neb-one.gc.ca/nrg/ntgrtd/ftr/2013/index-eng.html#smmr



• d)http://www.vereseninc.com/our-business/business-development/jordan-cove-lng-project/