Canadian Oil Producers Face More Output Cuts as Crude Tumbles

  • Output cuts come as crude falls to break-even levels
  • Producers can't cover costs at current oil prices: analysts

Canadian oil companies face another round of output cuts as the price of crude sinks below break-even levels for many producers.

Operating in one of the most expensive regions in the world, oil producers are cutting spending or, in the worst cases, halting production. The price rout is being compounded by concerns about growth in China and emerging economies as well as interest rates and equity markets, according to Martin King, vice president of research at First Energy Capital Corp. in Calgary.

“The latest price moves would seem to suggest that supply shut-ins are needed and that future capex should be trimmed to the bone and beyond,” King said in a note to clients.

The Canadian division of China Petroleum & Chemical Corp., also known as Sinopec, may shut in production, Brian Tuffs, head of the Beijing-based company’s Canadian operations, said in an interview at an industry conference in Calgary Tuesday. The company has cut jobs and slashed capital spending to weather falling oil prices.

“We’re looking at this on a case-by-case basis,” Tuffs said. “We are not drilling wells for the purpose of cash flow.”

Chinese Markets

Crude is down more than 25 percent this year amid volatility in Chinese markets and speculation that the removal of restrictions that capped Iran’s oil sales will help prolong a worldwide glut. Royal Dutch Shell Plc, which is buying BG Group Plc in the industry’s largest deal in a decade, said in a preliminary earnings statement that profit probably shrank to as low as $1.6 billion from $3.3 billion a year earlier.

Credit Suisse Group AG Chief Investment Officer Michael Strobaek expects crude to reach a low of $25 a barrel. Glencore Plc Chairman Tony Hayward, formerly BP Plc’s chief executive officer, said current price levels are here for some time.

In Canada, “we can clearly see that no companies are able to cover all cash outflows at current oil prices,” National Bank of Canada analysts Kyle Preston, Dan Payne and Brian Milne said in a note.

In 2015, Baytex Energy Corp. shut in about 2,400 barrels a day of production while Canadian Natural Resources Ltd halted 5,700 barrels a day of conventional output.

Oil-sands operations are unlikely to experience shut-ins because of the high costs of restarting them, King said.

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