Crude oil drives industry profits to $8B
CALGARY — Oil industry profits will see a big boost this year as some of the cost-dampening effects of the recession linger, according to a forecast by the Conference Board of Canada.
However, the business think-tank cautioned the price of labour and materials is poised to rise in future years as the pace of development picks up in the oilsands.
“The recession had one positive effect — costs in the industry have come down precipitously,” said the report released Thursday.
Numerous oilsands producers began to put their multibillion-dollar projects on hold in late 2008, as the recession whittled away at demand for fossil fuels and made it too costly for companies to borrow money. Investment in the sector contracted by 26.4 per cent last year, causing capital costs to decline at a similar rate, the Conference Board said.
Many of those delayed oilsands projects have since been put on the front burner. Increased production from those projects, along with stronger crude oil prices, has led the Conference Board to predict oil industry profits of $8.1 billion this year.
That’s two-thirds higher than the $4.9 billion the industry eked out last year, but still half what it raked in at the height of the boom in 2008. The Conference Board doesn’t expect a return to boom-time profits of $16.1 billion until 2014, when crude prices are expected to be US$114 per barrel.
Before the recession hit full-force in 2008, the oilsands were experiencing an enormous boom with crude prices above US$140 a barrel. Producers scrambled to find enough workers to run their operations. Steel and construction materials became too costly. And Canadian consumers felt the brunt when they were forced to shell out $1.40 for a litre of gasoline.
The boom turned to bust rapidly, and the oilpatch ailed throughout much of 2009. Only in recent months have oilsands producers begun to gingerly dust off projects they had put on the shelf.
“Last year’s weakness will spill into 2010,” the Conference Board report said.
However, it added the “reprieve from rising costs will be short-lived.”
Capital costs are set to rise 13.2 per cent per year between 2011 and 2014. Costs are expected to top $103.7 billion in 2014, according to the forecast.
Scotiabank commodities specialist Patricia Mohr said she doubts the oilsands will experience the same unbearable cost inflation they did in 2008.
“I suspect that companies are going to be more careful to space out the major projects that they have. And I think there’s still a degree of caution on the outlook for oil prices going forward,” said Mohr.
“That probably is going to temper the pace of re-expansion and the pace of pickup in capital spending.”
Mohr expects crude to average US$83 per barrel in 2010, but with a lot of ups and downs throughout the year.
The Conference Board expects crude prices to remain in their current range this year, averaging about US$79.74. Although inventories remain flush with oil, a recovery in the U.S. economy would help buoy prices in the near term.
“The U.S. economy accounts for a large share of global consumption, and higher industrial activity south of the border will push global demand back to pre-recession levels,” the report said.
Growth in the oilsands — deemed a “non-conventional” resource because of how much more work and money it takes to extract the oil — will account for the lion’s share of profit and revenue growth in the industry in coming years.
“Surging non-conventional production will outweigh the dismal performance in the conventional side of the industry,” the Conference Board report said.
Indeed, conventional production in Western Canada has been in steady decline for several years. And output from offshore oil platforms in Atlantic Canada will also fall over the medium term.
Non-conventional production, on the other hand, is expected to grow 6.7 per cent this year, as output from oilsands projects that were delayed in the depths of the recession ramps up.
Revenues for the industry are forecast to be $69.9 billion this year, only slightly higher than 2009, but are expected to climb an average of more than 14 per cent each year for the next four years, hitting nearly $120 billion in 2014.
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