In Spite Of Oil Price Slump, Canadian Oil Output To Increase

It was yet another depressing headline congruent with the rest of the bad news bombarding the battered Canadian oilpatch for 15 months. On February 22 Postmedia (National Post, Calgary Herald, Edmonton Journal) carried the headline, "Canadian oil production growth could come to 'complete standstill,' IEA warns."

It was based on the Medium-Term Oil Market report released by the International Energy Agency (IEA) on February 21 looking at global crude supply and demand for the next five years through the end of 2021. Based in Paris, the IEA is made up of 29 member countries which fund its research and reports into global energy markets.

The problem is that the headline is not true. At least not for the next three years, which is an eternity for the many exploration and production (E&P) and oilfield services (OFS) companies trying to figure out how to finish 2016 on the right side of the grass. Thanks to oilsands and east coast offshore projects still under construction, Canadian oil output is going to rise by 100,000 barrels per day (b/d) this year, 285,000 b/d in 2017 and 200,000 b/d in 2018, a total of 585,000 b/d. This is more oil than OPEC members Ecuador and Libya averaged in the fourth quarter of 2015.The two big projects which will move the needle on Canadian output the most are Suncor Fort Hills and Hebron, along with several others.

What the IEA actually wrote - which the headline writers apparently missed - was, "We are likely to see continued capacity increases (in Canada in) the near term, with growth slowing considerably, if not coming to a complete standstill, after the projects under construction are completed." Which is 2019, unless the developers of these projects pull the plug. As awful as things are for most folks and companies working in the upstream oil and gas industry after 15 months of collapsed oil prices, growing oil and liquids production by 13 percent from about 4.6 million b/d to 5.2 million b/d over the next three years is a problem many oil-producing jurisdictions around the world would love to have. Canada's contribution to fixing global oversupply in the next three years will be to increase output. You're welcome. Don't tell anybody. Related: Who Will Be Left Standing At The End Of The Oil War

In fact, the IEA's medium-term report shows an optimistic outlook for the next five years as supply and demand fall into line, which should cause prices to rise. Like all forecasters of repute, the IEA really only extrapolates, as opposed to predicts. All the IEA can do is take what it knows today and extrapolate it out into the future. It cannot predict geopolitical events or technological advancements which have not yet taken place. But based on their database and modelling, the IEA report sees the next five years unfolding as follows.

(Click to enlarge)

Source: International Energy Agency February 21, 2016

*OPEC actual in 2015. Assumes post-sanctions increase for Iran in 2016 and adjusts for OPEC capacity changes thereafter.
**OPEC Natural Gas Liquids

What this data shows is summarized as follows:

• After growing by 1.6 million b/d in 2015, global crude oil demand is expected to grow by an average of 1.2 million b/d for 2016 and each of the five subsequent years. In total, the world is forecast to consume 6 million b/d more in 2021 than 2016. Producing petroleum is hardly a sunset industry.

• Non-OPEC oil supply will decline in 2016 and not reach 2015 levels until 2018. The IEA sees U.S. light tight oil production declining by 600,000 b/d this year and 200,000 b/d next year. Thereafter it will recover primarily due to technological advancements and operating efficiencies.

• OPEC production will rise this year primarily because of Iran, but remain almost flat from 2017 through 2019.

• The implied stock change is the amount of oil going into or out of storage. There were large storage builds in 2015 which have been bearish on prices. IEA says this will continue through 2016, but by next year this will stop and decline thereafter. Related: This Is What Will Cause A Lasting Oil Price Rally

• Not shown on this chart is the IEA's annual decline estimate of 3 million b/d per year. Combined with demand growth, this means to achieve the above production levels the industry will have to bring over 4 million b/d on stream annually among both OPEC and non-OPEC producers. With capital spending being slashed across the board in the vast majority of oil producing regions, the IEA does not explain where the money to replace production lost due natural reservoir declines will come from.

Although these figures show general improvement for global oil markets, the IEA is not optimistic about prices writing, "Unless we see an even larger than expected fall in non-OPEC oil production in 2016 and / or a major demand growth spurt, it is hard to see oil prices recovering significantly in the short term from the low levels prevailing at the time of publication of this report."

That stated, the IEA also cautions, "It is very tempting, but also very dangerous, to declare that we are in a new era of lower oil prices. But at the risk of tempting fate, we must say that today's oil market conditions do not suggest that prices could recover sharply in the immediate future - unless, of course, there is a major geopolitical event." The end of this statement underlines the rigidity of forecasting. Analysts cannot predict geopolitical turmoil or other factors but a major event involving one or more major oil producers - a variety of potential outcomes from war to cooperation - could impact supply, demand and price significantly.

The IEA does not publish a price forecast but admits the implications of continued low prices could be as disruptive as high prices were in flooding markets with more crude. The IEA writes, "Another downside to low oil prices is the impact on investment. The IEA has regularly warned of the potential consequences of the 24 percent fall in investment seen in 2015 and the expected 17 percent fall in 2016.

In today's oil market there is hardly any spare production capacity other than in Saudi Arabia and Iran and significant investment is required just to maintain existing production before we move on to provide the new capacity needed to meet rising oil demand. The risk of a sharp oil price rise towards the later part of our forecast arising from insufficient investment is potentially (as) destabilizing as the sharp oil price fall has proved to be."

The two most important pieces of information from the IEA data are that demand will continue to increase at a steady pace and reservoir output will decline. As written above, the two combine to require a minimum of more than 4 million b/d of new production to come on stream each year to meet demand. Where this will come from is not easy to grasp as E&P companies slash capital budgets and spending programs and rigs are racked. Related: Electric Car War Sends Lithium Prices Sky High

Although the IEA admits the net result of slashed spending could be a sharp oil price spike, in its forecast it assumes the required oil output increases will be there without much explanation about where it will come from. Except it won't be from Canada in 2019, 2020 and 2021. But if prices rise high enough new supplies will eventually come to market from somewhere.

What does this mean for Canada? Again, our production is rising for the next three years, so long as the projects that will create the additional output are not cancelled in the way Shell's Carmon Creek was mothballed last year. For OFS companies providing production services, the pie will grow. If prices stay the same and production increases, cash flow will rise, increasing the capital available for investment.

History has proven that the one certainty about these figures is that they are not correct. Predicting what world oil markets will do five years from now is fraught with risk. Nobody has ever been particularly successful in this exercise. One can only assume that for the 29 sponsoring countries some information is better than none.

But despite the negative headlines and the checkered history of oil forecasts, the IEA figures at least show steady progress in global supply and demand moving into balance. Demand growth will continue as emerging countries industrialize. Supply at current prices is very risky.

By David Yager for Oilprice.com

More Top Reads From Oilprice.com:

• How A Premature Interest Rate Hike Could Spell Disaster For Oil
• 35% Of Public Oil Companies Could Face Bankruptcy
• Is This The Most Bullish News For Oil Since 2014?