Resource World Magazine

F E B R U A R Y / M A R C H 2 0 1 5 www.resourceworld.com 59 based its budget on oil at just under $100 a barrel. And Newfoundland had assumed oil prices would be $105 last spring, when Brent Crude was going for $115 a barrel. It's not just governments that are expect- ing leaner times. Companies in the real economy that have spent billions expand- ing the Athabasca oilsands are cutting back. schlumberger [SLB-NYSE], the world's biggest oilfield service provider, has reacted by eliminating 9,000 positions from its workforce, about 7% of its 123,000 employees. That's one of the largest single workforce reductions by any company in the history of oil and gas industry busts. And the company has said there may be more to come later this year. canadian natural resources ltd. [CNQ-TSX], for example, recently announced they were chopping 28%, or $2.4 billion, from their 2015 capital plan. Their Kirby oilsands project, and conven- tional oil and gas operations in Canada and overseas, will bear the brunt of the cut, which will reduce their overall capital bud- get to $6.2 billion. The company will defer about $470 million of spending for the first phase of its Kirby North steam-driven oil- sands project and reduce drilling at its North American and international conventional oil and gas operations. But CNRL said the budget for its Horizon oilsands project has been left intact and the company expects the reduced capital spending will allow it to continue its dividend without changes. royal Dutch shell [RDS.A, RDS.B-LSE] recently announced 200 layoffs at its Albian Sands Mine, one of the major producers in Alberta. This was viewed as significant because it went beyond cutting just con- tractor and construction jobs. The move affected less than 10% of the Albian work force, and the company said it remains on solid footing, even with the low price of oil, as Canadian synthetic crude production costs about $38 per barrel. Two camps for workers owned by civeo corp. [CVEO-NYSE] closed, with the company blaming cuts in oil companies' capital spending, while late last year total s.a. [TOT-NYSE; EN Paris] postponed its Joslyn oilsands project, while statoil [STL-OSE; STO-NYSE] put the brakes on a Kai Kos Dehseh Project. In December, Husky and Penn West both trimmed their spending budgets by billions of dollars. suncor energy Inc. [SU-TSX, NYSE], known for its huge presence in Alberta's oilsands, is reducing its workforce by 1,000 and cutting $1 billion from its capital bud- get. Suncor says the job cuts will mainly affect contractors, but will include some employee positions. In November, Suncor predicted capital spending for 2015 would range between $7.2 billion and $7.8 bil- lion. Suncor is also targeting operating cost reductions of between $600 million and $800 million over the next two years. Projects that haven't yet been given a final go-ahead by Suncor's board are being deferred, such as the MacKay River 2 steam- driven oilsands project in northeastern Alberta and the White Rose development off the east coast, which is operated by partner husky energy Inc. [HSE-TSX]. But major projects under construction, such as the $13.5-billion Fort Hills Mine, north of Fort McMurray, and the Hebron field in offshore Newfoundland, are moving ahead as planned, with startup for both targeted for 2017. Some oilpatch watchers are bracing for more, as the last time oil prices cratered like this was in the recession of 2008. Then, engineering investment in the province nosedived by about $18 billion, some 30,000 jobs in Alberta's mining sector disappeared, and housing starts fell 75%. Along with the industry, retailers and those in the hos- pitality sector have felt the impact and are waiting to see just how far that will go. Of course, every cloud has a silver lining and this one is no exception. The oil price drop has meant a reduction in gasoline prices, which consumers always welcome, plus the associated uncertainties have had negative impacts on the Canadian dollar, now trading around US $0.83, which warms the hearts of manufacturers and exporters. Equally pleased are those who benefit from lower prices for things like electricity, trans- portation and heating. Most households will have more disposable income left over for spending on other goods and services, thanks to the lower prices. Mark Scholz, president of the Canadian Association of Oilfield Drillers and Contractors (CAODC), is cautioning against panic. "At this stage there hasn't been that much of an impact but there is greater pressure on day rates," he said, noting that most compa- nies based their forecasts on $85 oil. "We're seeing some pullbacks but there hasn't been all that much change to date. Q1 looks stable but after that we're incredibly uncertain. "If the rate stays below $60 for any extended period of time, though, the impacts will be greater." Scholz said supply economics are behind the drop, as they have changed dramatically. He noted, for example, that US production has gone from five million barrels a day nine months ago to 10 million a day now. Also, he noted, improvements in technology have had their impact. "Plays once considered uneconomical are now economical," he said. "OPEC sees a challenge to their dominance," he added. "Now it's a game of chicken played by the Saudis and OPEC to stave off North American production." John Stevens, CEO of entrec corp. [ENT- TSX], predicted that the current situation will have a negative impact on oil drilling, though he stressed that diversified compa- nies like his are in a better position to ride it out. "Gas will continue on until LNG sorts itself out, and the current (low) gas price has no bearing on LNG." Stevens said government must acknowledge the difference between man- ufacturing and distribution and enable at least three LNG facilities to come on stream and get signed contracts with customers. "They need signed contracts to make LNG work," he said. "They won't invest with- out signed contracts. It won't work on spot "Now it's a game of chicken played by the Saudis and OPEC to stave off North American production."

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