Oil producers in Canada are closing their taps – probably among the first of many

A couple of weeks ago I wrote about the slumping price of oil – the lowest in six years – and what this entails for the industry: half a trillion in debt collectively owed by 168 companies, more than $200 billion in shelved exploration and research projects, and hundreds of thousands of jobs sacked. You’d think that producers, pressured by these tough times, would cut production. The laughing matter is that, in fact, the whole ordeal is caused by producers (*cough Saudis) who have flooded the market with oil. In the short run, everybody is bound to lose money. On the long run.. well, we might be in for some dramatic shifts no sooner than two or three years from now. There will definitely be some sore losers.

Nia Williams reports for Reuters that we’re finally seeing sign of this madness coming a bit down. In Canada, heavy oil producers like Gear Energy Ltd,  Canadian Natural Resources Ltd and Baytex Energy Corp have all idled hundreds of otherwise top performing wells. In total, some 8,000 barrels per day (bpd) of local heavy conventional oil production has been idled. And no wonder when you consider some of these wells “cost of up to $28 a barrel to operate. It costs another $7 in royalty and transportation fees to get the crude, among the densest in the world, to regional rail hubs – where it was fetching barely US$20 a barrel during last month’s lows,” Williams wrote. Yes, that’s a mere drop in the tar ocean that is the global oil market which amounts to 95 million barrels each day. Make no mistake though – you’ll be hearing of more news like this if oil prices stay at this level.

You shouldn’t feel too bad for the producers, either. Everybody is tightening their pockets until oil inevitably rebounds. It’s who has enough capital to spare that will survive.

“Heavy oils are some of the most flexible capital and can easily be dialled back up or ramped back up again if we choose,” CNRL chief executive Steve Laut told analysts last month.

“For us it’s honestly a matter of flicking a switch,” says Ingram Gillmore, chief executive of Gear Energy, which produces 5,500 bpd in the region. “I can bring production back into an improved pricing environment in a matter of days.”

Wood Mackenzie, an energy analyst, made an analysis this year in which he model what would happened if the market stayed at  $40 a barrel ($/bbl).

“The cash operating cost for oil fields becomes very important as prices producers can achieve for the oil they produce nears the marginal point. It can be a more immediate brake on production, although when and how that might be reached is never easy to predict.

“The point at which producing oil fields become cash negative is key in assessing how far the oil price could fall. Once the oil price reaches these levels, producers have a sometimes complex decision to continue producing, losing money on every barrel produced, or to halt production, which will reduce supply.”

I was mentioning some winners and losers once this ‘oil war’ – since that’s what it looks like – is all over. What are the sides you might ask? Well, for one forget about OPEC. The oil cartel is basically castrated. To me, and other analysts, it all seems like a bad gamble Saudi Arabia made in an attempt to choke the booming shale industry in the US. What they may have not considered in this ploy, however, is how resilient oil producers in the US are and how cheap it is to maintain a shale drilling operation. Drilling costs are down to half those reported last year. One Saudi expert was quoted by Telegraph as saying, “the policy hasn’t worked and it will never work,” he said.

The Saudi’s existential crisis aside, it will be extremely interesting to follow what the industry will look like two to three years from now. This isn’t the last oil bust, but it’s definitely a big shaker. How many can the industry take before tanking for good? Now that’s a headline for 2030 onward. Maybe you’ll remember.