Canada’s Shrinking Oil and Gas Profits


Read this story from the Huffington Post on the shrinking profit margins from Canada’s oil and gas sector and how that could be a sign of things to come. (July 25, 2012)

The talk coming out of Canada’s oil patch in recent months has been increasingly tinged with panic. Industry leaders are growing worried about the oil sands’ future prospects, and the earnings reports coming out this week are a good sign of why that may be.

Oil producer Cenovus on Wednesday reported a 40-per-cent decline in profit in the latest quarter, falling to $396 million from $655 million a year earlier.

Things were even worse for Calgary-based natural gas producer Encana, which recorded a whopping quarterly $1.48 billion loss. It had recorded a profit of $383 million in the same period a year earlier.

(And Canada’s largest energy producer — Suncor — said on Wednesday it’s mulling delaying some of its new projects. The company denied market conditions were behind the move, saying only that the company is “looking at how we get the best economics for those projects.”)

On the surface, the reason for this is obvious: Declining energy prices. Natural gas prices are at rock bottom, and prices for oil have been under downward pressure as the world economy faces a tough summer thanks to Europe’s credit crisis and a slowdown in China.

But beneath the surface is a rapidly-changing global energy industry. With the U.S. rapidly developing its shale oil and gas deposits, Asia increasingly looking to renewable energy, and the controversy over the environmental impact of the oil sands showing no signs abating, Canada’s energy exporters could find themselves in a seemingly unthinkable situation: Lots of oil, and few markets to sell it.

All this is happening just as Canada’s dependence on energy exports has been reaching new heights. As the Globe and Mail reported, oil and gas sales, as well investment in oil sands infrastructure, accounted for one-third of Canada’s economic growth in 2010 and 2011.

So what happens to Canada when energy and commodity prices go down? One thing that happens is it becomes cheaper to tank up your car. But at a certain point, as prices come down, the benefit to Canada of lower gas bills and cheaper commodities is overtaken by the cost to the economy of lost exports.

“If oil prices get to a point where they are going to deter investment in the [energy] sector, the negatives outweigh the benefits,” TD Bank economist Diana Petramala told the Globe.

That scenario — unthinkable just a few years ago — may be exactly what Canada’s natural resource sector may be facing. And it’s not just a temporary blip in prices Canada is facing — it may be a permanent and revolutionary shift in energy extraction that makes Canada’s oil sands far less desirable than they seemed until now.

One thing threatening Canada’s energy sector is the new American oil and gas boom. With new extraction techniques like hydraulic fracturing coming online, U.S. energy companies are busily starting to drill on domestic soil again. The oil industry in Texas is booming in a way it hasn’t in more than three decades, and plenty of other, less expected, places are becoming oil meccas. Meanwhile, new supplies of natural gas have pushed prices for the energy source down to near-record levels.

This boom is already having tangible effects on Canada’s oil industry. Insiders estimate that Canadian exporters, unable to export to markets other than the U.S., are facing a $15 per barrel discount on the oil they sell, when compared to international Brent crude prices.

But it’s not just supply and demand that’s cutting into Canadian energy profits — it’s Canada’s lacklustre response to the world’s concerns about oil sands carbon pollution.

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