Further Retrenching By Energy Majors

Canadian Natural Resources Ltd. said Jan. 12 that it had to revise its initial 2015 budget by cutting its forecasts for capital spending and production for the year. The reason: the precipitous drop in the price of oil since Nov. 6, when it drew up the draft budget for the year.

Canadian Natural had originally planned to spend US $7.28 billion on capital investment projects, but now has cut that amount to US $5.25 billion. As for production, it now plans to increase extraction of oil and gas liquids by about 7 percent over the levels of 2014, not by 11 percent as previously projected. Production in 2015 is now projected to top out at 592,000 barrels of fuel per day, down from 611,000.

In fact, Canadian Natural said the low price of oil will diminish its work to extract oil both in North America, the North Sea and off the West African coast and stall the spending of almost US $400 million for a new oil sands project linked to what’s called the Kirby North Phase 1 project in Alberta.

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In a statement, the company said that project will remain on hold “until such time as commodity prices stabilize at levels that justify such capital expenditures.” It also didn’t rule out further spending cuts “if required.”

Despite these cutbacks, Canadian Natural’s statement said the company still intends to “remain on track” for one project, increasing production at Horizon, a key oil sands mine in Alberta, by 125,000 barrels per day through 2016. It expects that the mine’s operating costs will be under US $25 per barrel, well below the current market price for Canadian crude oil.

The Canadian Natural budget revisions mark the second time in a week that a leading energy company has had to cut back its plans in Canada. On Jan. 9, the Canadian subsidiary of the British-Dutch energy giant Royal Dutch Shell announced that it would be forced to cut as much as 10 percent of its work force in the oil sands of the western province of Alberta, also citing lower oil prices.

Shell and Canadian Natural aren’t alone. The precipitous drop in oil prices – more than 50 percent since June 2014 – is expected to cut into profits and thereby slow the growth of many other energy companies, especially those with expensive methods of energy extraction.

Related: British Columbia Bars LNG Pipelines From Carrying Oil Sands

They include companies that extract oil from porous sandstone – such as the oil sands of Western Canada – and those that rely on hydraulic fracturing, or fracking, which has been used in the United States to free oil and gas trapped in shale, thereby making the country nearly self-sufficient in oil.

However, the lower the cost of oil, the less these companies can rely on reasonable profits for their efforts. Already, US companies that rely on shale oil are accelerating the pace at which they’re decommissioning the number of their drilling rigs. And if the price of oil drops much further, their profit margins will evaporate altogether.

In fact, the problem exists far beyond North America. Cowen and Company, the New York-based financial services organization, reported Jan. 7 that oil and gas exploration companies around the world are likely to cut expenditures in 2015 by 17 percent.

By Andy Tully of Oilprice.com

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